Is FN REPUBLIC (KOSDAQ:064090) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that FN REPUBLIC Co., Ltd (KOSDAQ:064090) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for FN REPUBLIC

How Much Debt Does FN REPUBLIC Carry?

The image below, which you can click on for greater detail, shows that FN REPUBLIC had debt of ₩7.75b at the end of September 2020, a reduction from ₩20.9b over a year. On the flip side, it has ₩1.09b in cash leading to net debt of about ₩6.67b.

How Strong Is FN REPUBLIC's Balance Sheet?

According to the last reported balance sheet, FN REPUBLIC had liabilities of ₩47.9b due within 12 months, and liabilities of ₩229.6m due beyond 12 months. On the other hand, it had cash of ₩1.09b and ₩10.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩36.8b.

Given this deficit is actually higher than the company's market capitalization of ₩31.8b, we think shareholders really should watch FN REPUBLIC's debt levels, like a parent watching their child ride a bike for the first time. 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 it is FN REPUBLIC's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year FN REPUBLIC's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, FN REPUBLIC had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩27b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₩42b. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with FN REPUBLIC (including 1 which is shouldn't be ignored) .

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. 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.
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