Is FADU (KOSDAQ:440110) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that FADU Inc. (KOSDAQ:440110) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is FADU's Debt?

You can click the graphic below for the historical numbers, but it shows that FADU had ₩14.5b of debt in December 2024, down from ₩34.5b, one year before. But on the other hand it also has ₩45.8b in cash, leading to a ₩31.3b net cash position.

How Strong Is FADU's Balance Sheet?

According to the last reported balance sheet, FADU had liabilities of ₩31.3b due within 12 months, and liabilities of ₩5.22b due beyond 12 months. Offsetting this, it had ₩45.8b in cash and ₩15.0b in receivables that were due within 12 months. So it can boast ₩24.3b more liquid assets than total liabilities.

This surplus suggests that FADU has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FADU has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if FADU can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for FADU

In the last year FADU wasn't profitable at an EBIT level, but managed to grow its revenue by 94%, to ₩44b. With any luck the company will be able to grow its way to profitability.

So How Risky Is FADU?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months FADU lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩116b of cash and made a loss of ₩91b. Given it only has net cash of ₩31.3b, the company may need to raise more capital if it doesn't reach break-even soon. FADU's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - FADU has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.