CJ ENM (KOSDAQ:035760) Has Debt But No Earnings; Should You Worry?

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. Importantly, CJ ENM CO., Ltd. (KOSDAQ:035760) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CJ ENM

What Is CJ ENM's Debt?

You can click the graphic below for the historical numbers, but it shows that CJ ENM had ₩3.11t of debt in December 2023, down from ₩3.46t, one year before. However, because it has a cash reserve of ₩1.12t, its net debt is less, at about ₩1.99t.

How Strong Is CJ ENM's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CJ ENM had liabilities of ₩3.40t due within 12 months and liabilities of ₩2.37t due beyond that. Offsetting this, it had ₩1.12t in cash and ₩1.13t in receivables that were due within 12 months. So it has liabilities totalling ₩3.53t more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩1.64t company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, CJ ENM 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 ultimately the future profitability of the business will decide if CJ ENM can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, CJ ENM made a loss at the EBIT level, and saw its revenue drop to ₩4.4t, which is a fall of 8.8%. We would much prefer see growth.

Caveat Emptor

Importantly, CJ ENM had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩23b. 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 ₩171b 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 1 warning sign for CJ ENM 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.