These 4 Measures Indicate That Evergreen Gaming (CVE:TNA) Is Using Debt Safely

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.' 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. We can see that Evergreen Gaming Corporation (CVE:TNA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Evergreen Gaming

How Much Debt Does Evergreen Gaming Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Evergreen Gaming had US$9.62m of debt, an increase on US$4.73m, over one year. But on the other hand it also has US$21.4m in cash, leading to a US$11.8m net cash position.

A Look At Evergreen Gaming's Liabilities

According to the last reported balance sheet, Evergreen Gaming had liabilities of US$8.11m due within 12 months, and liabilities of US$10.7m due beyond 12 months. Offsetting this, it had US$21.4m in cash and US$2.14m in receivables that were due within 12 months. So it can boast US$4.72m 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!

Pleasingly, Evergreen Gaming is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 411% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Evergreen Gaming 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, a company can only pay off debt with cold hard cash, not accounting profits. Evergreen Gaming 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 most recent three years, Evergreen Gaming recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Evergreen Gaming has net cash of US$11.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 411% year-on-year EBIT growth. So we don't think Evergreen Gaming's use of debt is risky. 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 example Evergreen Gaming has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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