Is Finetek (KOSDAQ:131760) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Finetek Co., Ltd. (KOSDAQ:131760) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Finetek

What Is Finetek's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Finetek had debt of ₩36.8b, up from ₩29.1b in one year. However, because it has a cash reserve of ₩17.0b, its net debt is less, at about ₩19.8b.

How Healthy Is Finetek's Balance Sheet?

We can see from the most recent balance sheet that Finetek had liabilities of ₩54.4b falling due within a year, and liabilities of ₩12.7b due beyond that. Offsetting this, it had ₩17.0b in cash and ₩33.4b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩16.7b.

While this might seem like a lot, it is not so bad since Finetek has a market capitalization of ₩60.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Finetek will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Finetek wasn't profitable at an EBIT level, but managed to grow its revenue by 4.3%, to ₩81b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Finetek had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩6.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩7.0b of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Finetek has 4 warning signs (and 2 which are significant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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