Enlight (TPE:2438) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. As with many other companies Enlight Corporation (TPE:2438) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Enlight

What Is Enlight's Debt?

As you can see below, Enlight had NT$46.0m of debt at December 2020, down from NT$85.9m a year prior. However, its balance sheet shows it holds NT$275.2m in cash, so it actually has NT$229.1m net cash.

How Healthy Is Enlight's Balance Sheet?

According to the last reported balance sheet, Enlight had liabilities of NT$83.6m due within 12 months, and liabilities of NT$41.2m due beyond 12 months. On the other hand, it had cash of NT$275.2m and NT$107.3m worth of receivables due within a year. So it actually has NT$257.7m more liquid assets than total liabilities.

This excess liquidity suggests that Enlight is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Enlight boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Enlight if management cannot prevent a repeat of the 85% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Enlight will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Enlight may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Enlight actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Enlight has NT$229.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$100m, being 256% of its EBIT. So we don't think Enlight's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Enlight 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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This article by Simply Wall St is general in nature. 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.
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