These 4 Measures Indicate That FIBERPRO (KOSDAQ:368770) Is Using Debt Reasonably Well

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. Importantly, FIBERPRO, Inc. (KOSDAQ:368770) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for FIBERPRO

What Is FIBERPRO's Debt?

As you can see below, FIBERPRO had ₩5.31b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩8.31b in cash offsetting this, leading to net cash of ₩2.99b.

A Look At FIBERPRO's Liabilities

We can see from the most recent balance sheet that FIBERPRO had liabilities of ₩6.35b falling due within a year, and liabilities of ₩4.25b due beyond that. On the other hand, it had cash of ₩8.31b and ₩4.89b worth of receivables due within a year. So it can boast ₩2.60b more liquid assets than total liabilities.

This surplus suggests that FIBERPRO has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FIBERPRO has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that FIBERPRO saw its EBIT decline by 6.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine FIBERPRO's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While FIBERPRO has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, FIBERPRO burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that FIBERPRO has net cash of ₩2.99b, as well as more liquid assets than liabilities. So we don't have any problem with FIBERPRO's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with FIBERPRO (including 1 which can'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. 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.

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