Is ENNOSTAR (TWSE:3714) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ENNOSTAR Inc. (TWSE:3714) does carry debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does ENNOSTAR Carry?

As you can see below, ENNOSTAR had NT$2.80b of debt at December 2024, down from NT$5.77b a year prior. However, its balance sheet shows it holds NT$15.3b in cash, so it actually has NT$12.5b net cash.

A Look At ENNOSTAR's Liabilities

Zooming in on the latest balance sheet data, we can see that ENNOSTAR had liabilities of NT$9.68b due within 12 months and liabilities of NT$2.26b due beyond that. On the other hand, it had cash of NT$15.3b and NT$9.02b worth of receivables due within a year. So it actually has NT$12.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that ENNOSTAR's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 ultimately the future profitability of the business will decide if ENNOSTAR 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.

View our latest analysis for ENNOSTAR

In the last year ENNOSTAR wasn't profitable at an EBIT level, but managed to grow its revenue by 9.3%, 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$1.7b. 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. 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 3 warning signs for ENNOSTAR you should be aware of.

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.