Is ENEX (KRX:011090) Using Debt Sensibly?

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. We can see that ENEX Co., LTD. (KRX:011090) does use debt in its business. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for ENEX

What Is ENEX's Debt?

As you can see below, at the end of March 2024, ENEX had ₩33.0b of debt, up from ₩24.0b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩10.7b, its net debt is less, at about ₩22.3b.

A Look At ENEX's Liabilities

The latest balance sheet data shows that ENEX had liabilities of ₩78.3b due within a year, and liabilities of ₩27.6b falling due after that. On the other hand, it had cash of ₩10.7b and ₩36.3b worth of receivables due within a year. So it has liabilities totalling ₩59.0b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩35.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, ENEX would probably need a major re-capitalization if its creditors were to demand repayment. 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 ENEX will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ENEX wasn't profitable at an EBIT level, but managed to grow its revenue by 9.7%, to ₩236b. 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. Indeed, it lost ₩1.8b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩16b in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for ENEX (of which 2 don't sit too well with us!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com