We Think FINETEK (KOSDAQ:131760) Has A Fair Chunk Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that FINETEK Co., Ltd. (KOSDAQ:131760) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for FINETEK

How Much Debt Does FINETEK Carry?

As you can see below, FINETEK had ₩31.0b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩16.0b in cash leading to net debt of about ₩15.0b.

How Strong Is FINETEK's Balance Sheet?

The latest balance sheet data shows that FINETEK had liabilities of ₩56.4b due within a year, and liabilities of ₩10.3b falling due after that. Offsetting these obligations, it had cash of ₩16.0b as well as receivables valued at ₩46.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩4.28b.

Of course, FINETEK has a market capitalization of ₩70.6b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FINETEK's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, FINETEK made a loss at the EBIT level, and saw its revenue drop to ₩81b, which is a fall of 3.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, FINETEK had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩5.2b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩9.6b 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with FINETEK (including 2 which don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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