Canfor (TSE:CFP) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Canfor Corporation (TSE:CFP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Canfor

What Is Canfor's Net Debt?

As you can see below, Canfor had CA$268.7m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$860.7m in cash offsetting this, leading to net cash of CA$592.0m.

How Strong Is Canfor's Balance Sheet?

We can see from the most recent balance sheet that Canfor had liabilities of CA$881.7m falling due within a year, and liabilities of CA$1.01b due beyond that. On the other hand, it had cash of CA$860.7m and CA$603.0m worth of receivables due within a year. So it has liabilities totalling CA$429.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Canfor has a market capitalization of CA$1.83b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Canfor also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Canfor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Canfor made a loss at the EBIT level, and saw its revenue drop to CA$5.9b, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Canfor?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Canfor lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$550m of cash and made a loss of CA$306m. Given it only has net cash of CA$592.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Canfor I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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.