Is ENVIONEERLtd (KOSDAQ:317870) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, ENVIONEER Co.,Ltd. (KOSDAQ:317870) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 ENVIONEERLtd

What Is ENVIONEERLtd's Net Debt?

The image below, which you can click on for greater detail, shows that ENVIONEERLtd had debt of ₩5.22b at the end of September 2020, a reduction from ₩7.44b over a year. However, it does have ₩12.7b in cash offsetting this, leading to net cash of ₩7.46b.

How Healthy Is ENVIONEERLtd's Balance Sheet?

We can see from the most recent balance sheet that ENVIONEERLtd had liabilities of ₩4.07b falling due within a year, and liabilities of ₩4.65b due beyond that. Offsetting these obligations, it had cash of ₩12.7b as well as receivables valued at ₩611.6m due within 12 months. So it actually has ₩4.57b more liquid assets than total liabilities.

This surplus suggests that ENVIONEERLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ENVIONEERLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year ENVIONEERLtd had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩7.8b. To be frank that doesn't bode well.

So How Risky Is ENVIONEERLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ENVIONEERLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩2.1b of cash and made a loss of ₩424m. With only ₩7.46b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Take risks, for example - ENVIONEERLtd has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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