Health Check: How Prudently Does ENNOSTAR (TWSE:3714) Use Debt?

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.' 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. As with many other companies ENNOSTAR Inc. (TWSE:3714) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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$4.05b of debt in June 2024, down from NT$6.71b, one year before. But on the other hand it also has NT$15.7b in cash, leading to a NT$11.6b net cash position.

How Strong Is ENNOSTAR's Balance Sheet?

We can see from the most recent balance sheet that ENNOSTAR had liabilities of NT$10.8b falling due within a year, and liabilities of NT$2.86b due beyond that. Offsetting these obligations, it had cash of NT$15.7b as well as receivables valued at NT$9.24b due within 12 months. So it can boast NT$11.2b more liquid assets than total liabilities.

This surplus liquidity suggests that ENNOSTAR's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, ENNOSTAR boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ENNOSTAR wasn't profitable at an EBIT level, but managed to grow its revenue by 3.5%, to NT$24b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$370m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 2 warning signs for ENNOSTAR you should be aware of, and 1 of them is a bit unpleasant.

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.