Does EnexLtd (KRX:011090) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Enex Co.,Ltd (KRX:011090) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for EnexLtd

What Is EnexLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that EnexLtd had ₩13.2b in debt in December 2020; about the same as the year before. But on the other hand it also has ₩24.6b in cash, leading to a ₩11.4b net cash position.

How Strong Is EnexLtd's Balance Sheet?

According to the last reported balance sheet, EnexLtd had liabilities of ₩59.6b due within 12 months, and liabilities of ₩8.05b due beyond 12 months. Offsetting these obligations, it had cash of ₩24.6b as well as receivables valued at ₩34.4b due within 12 months. So its liabilities total ₩8.69b more than the combination of its cash and short-term receivables.

Of course, EnexLtd has a market capitalization of ₩125.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, EnexLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EnexLtd 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.

Over 12 months, EnexLtd made a loss at the EBIT level, and saw its revenue drop to ₩234b, which is a fall of 36%. That makes us nervous, to say the least.

So How Risky Is EnexLtd?

Although EnexLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩15b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 2 warning signs with EnexLtd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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