FrtekLtd (KOSDAQ:073540) Is Making Moderate Use Of 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.' 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, Frtek Co.Ltd. (KOSDAQ:073540) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for FrtekLtd

How Much Debt Does FrtekLtd Carry?

As you can see below, at the end of June 2020, FrtekLtd had ₩21.8b of debt, up from ₩18.9b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩7.77b, its net debt is less, at about ₩14.0b.

A Look At FrtekLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that FrtekLtd had liabilities of ₩21.0b due within 12 months and liabilities of ₩7.64b due beyond that. Offsetting these obligations, it had cash of ₩7.77b as well as receivables valued at ₩3.46b due within 12 months. So it has liabilities totalling ₩17.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because FrtekLtd is worth ₩66.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is FrtekLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FrtekLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to ₩25b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate FrtekLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₩787m 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. We would feel better if it turned its trailing twelve month loss of ₩1.5b into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for FrtekLtd (of which 1 doesn't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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