CJ ENM (KOSDAQ:035760) Has A Somewhat Strained Balance Sheet

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.' 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. Importantly, CJ ENM CO., Ltd. (KOSDAQ:035760) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is CJ ENM's Net Debt?

The image below, which you can click on for greater detail, shows that CJ ENM had debt of ₩2.44t at the end of March 2025, a reduction from ₩3.42t over a year. However, it also had ₩910.4b in cash, and so its net debt is ₩1.53t.

How Strong Is CJ ENM's Balance Sheet?

We can see from the most recent balance sheet that CJ ENM had liabilities of ₩3.97t falling due within a year, and liabilities of ₩1.51t due beyond that. On the other hand, it had cash of ₩910.4b and ₩1.06t worth of receivables due within a year. So its liabilities total ₩3.51t more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩1.43t 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 definitely think shareholders need to watch this one closely. After all, CJ ENM would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for CJ ENM

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

CJ ENM has a very low debt to EBITDA ratio of 0.92 so it is strange to see weak interest coverage, with last year's EBIT being only 0.62 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Notably, CJ ENM's EBIT launched higher than Elon Musk, gaining a whopping 129% on last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CJ ENM can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, CJ ENM actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

While CJ ENM's level of total liabilities has us nervous. For example, its conversion of EBIT to free cash flow and EBIT growth rate give us some confidence in its ability to manage its debt. Looking at all the angles mentioned above, it does seem to us that CJ ENM is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CJ ENM , 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.