Is FIC Global (TPE:3701) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 FIC Global, Inc. (TPE:3701) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for FIC Global

How Much Debt Does FIC Global Carry?

The image below, which you can click on for greater detail, shows that FIC Global had debt of NT$1.31b at the end of September 2020, a reduction from NT$1.58b over a year. However, it does have NT$1.07b in cash offsetting this, leading to net debt of about NT$237.1m.

How Healthy Is FIC Global's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FIC Global had liabilities of NT$2.51b due within 12 months and liabilities of NT$1.38b due beyond that. Offsetting these obligations, it had cash of NT$1.07b as well as receivables valued at NT$1.95b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$866.0m.

This deficit isn't so bad because FIC Global is worth NT$2.64b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FIC Global'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 FIC Global had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to NT$6.9b. That's not what we would hope to see.

Caveat Emptor

Importantly, FIC Global had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$24m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$70m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. For example - FIC Global has 1 warning sign we think you should be aware of.

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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