Is Fine DNC (KOSDAQ:049120) Using Too Much Debt?

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.' 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 can see that Fine DNC Co., Ltd. (KOSDAQ:049120) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Fine DNC

How Much Debt Does Fine DNC Carry?

The image below, which you can click on for greater detail, shows that Fine DNC had debt of ₩41.8b at the end of March 2024, a reduction from ₩49.9b over a year. However, it does have ₩5.24b in cash offsetting this, leading to net debt of about ₩36.6b.

A Look At Fine DNC's Liabilities

We can see from the most recent balance sheet that Fine DNC had liabilities of ₩55.7b falling due within a year, and liabilities of ₩16.5b due beyond that. Offsetting these obligations, it had cash of ₩5.24b as well as receivables valued at ₩10.5b due within 12 months. So it has liabilities totalling ₩56.5b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₩52.7b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Fine DNC 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 Fine DNC had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to ₩51b. We would much prefer see growth.

Caveat Emptor

Importantly, Fine DNC had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩6.7b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩11b over the last twelve months. That means it's on the risky side of things. 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, we've discovered 4 warning signs for Fine DNC (2 are concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com