Is FADU (KOSDAQ:440110) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, FADU Inc. (KOSDAQ:440110) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for FADU

How Much Debt Does FADU Carry?

As you can see below, at the end of March 2024, FADU had ₩34.5b of debt, up from ₩9.50b a year ago. Click the image for more detail. However, it does have ₩144.7b in cash offsetting this, leading to net cash of ₩110.2b.

How Healthy Is FADU's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FADU had liabilities of ₩44.6b due within 12 months and liabilities of ₩6.51b due beyond that. Offsetting this, it had ₩144.7b in cash and ₩3.08b in receivables that were due within 12 months. So it actually has ₩96.7b more liquid assets than total liabilities.

This short term liquidity is a sign that FADU could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

In the last year FADU had a loss before interest and tax, and actually shrunk its revenue by 89%, to ₩7.1b. To be frank that doesn't bode well.

So How Risky Is FADU?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year FADU had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩90b and booked a ₩68b accounting loss. But at least it has ₩110.2b on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for FADU that you should be aware of.

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. 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.