Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Evergreen Gaming Corporation (CVE:TNA) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
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What Is Evergreen Gaming's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Evergreen Gaming had debt of US$9.54m, up from US$4.79m in one year. However, it does have US$18.3m in cash offsetting this, leading to net cash of US$8.71m.
A Look At Evergreen Gaming's Liabilities
We can see from the most recent balance sheet that Evergreen Gaming had liabilities of US$5.98m falling due within a year, and liabilities of US$10.5m due beyond that. On the other hand, it had cash of US$18.3m and US$1.55m worth of receivables due within a year. So it actually has US$3.28m more liquid assets than total liabilities.
This surplus suggests that Evergreen Gaming has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Evergreen Gaming boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Evergreen Gaming's earnings that will influence how the balance sheet holds up in the future. 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 35%. To be frank that doesn't bode well.
So How Risky Is Evergreen Gaming?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Evergreen Gaming had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$2.6m and booked a US$2.1m accounting loss. With only US$8.71m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 3 warning signs for Evergreen Gaming (2 are potentially serious) 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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About TSXV:TNA
Evergreen Gaming
Evergreen Gaming Corporation, through its subsidiaries, engages in the operation of casinos in the United States and internationally.
Flawless balance sheet and good value.
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