Is Evergreen Gaming (CVE:TNA) Using Debt In A Risky Way?

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 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, Evergreen Gaming Corporation (CVE:TNA) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Evergreen Gaming

How Much Debt Does Evergreen Gaming Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Evergreen Gaming had debt of US$7.73m, up from US$4.93m in one year. However, its balance sheet shows it holds US$19.0m in cash, so it actually has US$11.3m net cash.

A Look At Evergreen Gaming's Liabilities

The latest balance sheet data shows that Evergreen Gaming had liabilities of US$3.20m due within a year, and liabilities of US$8.71m falling due after that. Offsetting these obligations, it had cash of US$19.0m as well as receivables valued at US$36.0k due within 12 months. So it actually has US$7.12m more liquid assets than total liabilities.

It's good to see that Evergreen Gaming has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Evergreen Gaming 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 you can't view debt in total isolation; since Evergreen Gaming will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Evergreen Gaming made a loss at the EBIT level, and saw its revenue drop to US$23m, which is a fall of 40%. To be frank that doesn't bode well.

So How Risky Is Evergreen Gaming?

Although Evergreen Gaming had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$1.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 4 warning signs with Evergreen Gaming (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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