Enertork (KOSDAQ:019990) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Enertork Ltd. (KOSDAQ:019990) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Enertork

What Is Enertork's Net Debt?

As you can see below, at the end of December 2020, Enertork had ₩3.26b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩8.65b in cash, leading to a ₩5.39b net cash position.

How Strong Is Enertork's Balance Sheet?

The latest balance sheet data shows that Enertork had liabilities of ₩1.81b due within a year, and liabilities of ₩3.61b falling due after that. Offsetting this, it had ₩8.65b in cash and ₩5.97b in receivables that were due within 12 months. So it actually has ₩9.21b more liquid assets than total liabilities.

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

Even more impressive was the fact that Enertork grew its EBIT by 303% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Enertork'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Enertork may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Enertork recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Enertork has net cash of ₩5.39b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 303% over the last year. So is Enertork's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Enertork (1 is significant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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