Does ENNOSTAR (TWSE:3714) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that ENNOSTAR Inc. (TWSE:3714) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ENNOSTAR

What Is ENNOSTAR's Debt?

You can click the graphic below for the historical numbers, but it shows that ENNOSTAR had NT$4.94b of debt in March 2024, down from NT$5.82b, one year before. However, its balance sheet shows it holds NT$16.5b in cash, so it actually has NT$11.5b net cash.

How Strong Is ENNOSTAR's Balance Sheet?

According to the last reported balance sheet, ENNOSTAR had liabilities of NT$11.0b due within 12 months, and liabilities of NT$3.48b due beyond 12 months. Offsetting this, it had NT$16.5b in cash and NT$8.93b in receivables that were due within 12 months. So it actually has NT$11.0b more liquid assets than total liabilities.

This surplus strongly suggests that ENNOSTAR has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that ENNOSTAR 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 future earnings, more than anything, that will determine ENNOSTAR's ability to maintain a healthy balance sheet going forward. 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, ENNOSTAR made a loss at the EBIT level, and saw its revenue drop to NT$23b, which is a fall of 7.6%. We would much prefer see growth.

So How Risky Is ENNOSTAR?

Although ENNOSTAR had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$554m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that ENNOSTAR is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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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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.