Is Fine DNC (KOSDAQ:049120) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Fine DNC Co., Ltd. (KOSDAQ:049120) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fine DNC

What Is Fine DNC's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fine DNC had ₩40.5b of debt in June 2024, down from ₩50.9b, one year before. However, it also had ₩6.36b in cash, and so its net debt is ₩34.2b.

A Look At Fine DNC's Liabilities

According to the last reported balance sheet, Fine DNC had liabilities of ₩62.1b due within 12 months, and liabilities of ₩12.7b due beyond 12 months. Offsetting these obligations, it had cash of ₩6.36b as well as receivables valued at ₩13.3b due within 12 months. So its liabilities total ₩55.1b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩55.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to ₩59b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Fine DNC still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩3.4b at the EBIT level. 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 ₩8.7b of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Fine DNC you should be aware of, and 2 of them are a bit unpleasant.

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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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.