Does ENVIONEERLtd (KOSDAQ:317870) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that ENVIONEER Co.,Ltd. (KOSDAQ:317870) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 ENVIONEERLtd

What Is ENVIONEERLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 ENVIONEERLtd had debt of ₩10.3b, up from ₩9.56b in one year. But on the other hand it also has ₩12.5b in cash, leading to a ₩2.18b net cash position.

How Healthy Is ENVIONEERLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ENVIONEERLtd had liabilities of ₩15.5b due within 12 months and liabilities of ₩7.84b due beyond that. Offsetting this, it had ₩12.5b in cash and ₩1.93b in receivables that were due within 12 months. So it has liabilities totalling ₩8.99b more than its cash and near-term receivables, combined.

Since publicly traded ENVIONEERLtd shares are worth a total of ₩154.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ENVIONEERLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although ENVIONEERLtd made a loss at the EBIT level, last year, it was also good to see that it generated ₩849m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ENVIONEERLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. ENVIONEERLtd 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 last year, ENVIONEERLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about ENVIONEERLtd's liabilities, but we can be reassured by the fact it has has net cash of ₩2.18b. So we are not troubled with ENVIONEERLtd's debt use. 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. We've identified 2 warning signs with ENVIONEERLtd (at least 1 which is significant) , and understanding them should be part of your investment process.

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.