Is FSN (KOSDAQ:214270) A Risky Investment?

Simply Wall St · 10/18 22:52

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, FSN Co., Ltd. (KOSDAQ:214270) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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 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 FSN

What Is FSN's Net Debt?

As you can see below, at the end of June 2024, FSN had ₩46.4b of debt, up from ₩33.5b a year ago. Click the image for more detail. On the flip side, it has ₩19.7b in cash leading to net debt of about ₩26.8b.

debt-equity-history-analysis
KOSDAQ:A214270 Debt to Equity History October 18th 2024

A Look At FSN's Liabilities

According to the last reported balance sheet, FSN had liabilities of ₩98.0b due within 12 months, and liabilities of ₩41.3b due beyond 12 months. On the other hand, it had cash of ₩19.7b and ₩112.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩6.76b.

Given FSN has a market capitalization of ₩66.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FSN will need earnings to service that debt. 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.

Over 12 months, FSN reported revenue of ₩186b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, FSN had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩4.1b. 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. Another cause for caution is that is bled ₩32b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for FSN (of which 2 are a bit concerning!) you should know about.

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.