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.' 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. We can see that Ene Technology Inc. (TPE:6243) does use debt in its business. But is this debt a concern to shareholders?
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. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Ene Technology's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Ene Technology had debt of NT$294.3m, up from NT$258.5m in one year. However, because it has a cash reserve of NT$167.0m, its net debt is less, at about NT$127.3m.
A Look At Ene Technology's Liabilities
The latest balance sheet data shows that Ene Technology had liabilities of NT$380.6m due within a year, and liabilities of NT$23.1m falling due after that. On the other hand, it had cash of NT$167.0m and NT$208.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$28.6m.
Since publicly traded Ene Technology shares are worth a total of NT$1.23b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Ene Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Ene Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to NT$619m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Ene Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$35m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$6.8m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Ene Technology you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About TWSE:6243
Ene Technology
Research, development, production, and sale of electronic components, information software, and circuit design services in China, Taiwan, and internationally.
Flawless balance sheet slight.