Is Canfor (TSE:CFP) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Canfor Corporation (TSE:CFP) does use debt in its business. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

How Much Debt Does Canfor Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Canfor had CA$627.1m of debt, an increase on CA$280.0m, over one year. However, it also had CA$128.5m in cash, and so its net debt is CA$498.6m.

A Look At Canfor's Liabilities

The latest balance sheet data shows that Canfor had liabilities of CA$1.10b due within a year, and liabilities of CA$1.03b falling due after that. Offsetting these obligations, it had cash of CA$128.5m as well as receivables valued at CA$603.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.40b.

This is a mountain of leverage relative to its market capitalization of CA$1.72b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for Canfor

Over 12 months, Canfor made a loss at the EBIT level, and saw its revenue drop to CA$5.3b, which is a fall of 2.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Canfor had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$504m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$361m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Canfor insider transactions.

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.

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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.