Is ENEX (KRX:011090) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, ENEX Co., LTD. (KRX:011090) 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 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, 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 ENEX

How Much Debt Does ENEX Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 ENEX had ₩32.8b of debt, an increase on ₩24.0b, over one year. However, it also had ₩17.3b in cash, and so its net debt is ₩15.5b.

A Look At ENEX's Liabilities

We can see from the most recent balance sheet that ENEX had liabilities of ₩88.9b falling due within a year, and liabilities of ₩20.5b due beyond that. On the other hand, it had cash of ₩17.3b and ₩31.7b worth of receivables due within a year. So it has liabilities totalling ₩60.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩28.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, ENEX would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is ENEX'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.

Over 12 months, ENEX reported revenue of ₩246b, which is a gain of 12%, 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, ENEX had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩65m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩10b. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example ENEX has 2 warning signs (and 1 which is potentially serious) we think 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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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.