Does Canfor Pulp Products (TSE:CFX) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Canfor Pulp Products Inc. (TSE:CFX) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Canfor Pulp Products

What Is Canfor Pulp Products's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Canfor Pulp Products had debt of CA$65.0m, up from CA$50.0m in one year. However, it does have CA$14.7m in cash offsetting this, leading to net debt of about CA$50.3m.

How Healthy Is Canfor Pulp Products' Balance Sheet?

We can see from the most recent balance sheet that Canfor Pulp Products had liabilities of CA$166.0m falling due within a year, and liabilities of CA$162.6m due beyond that. Offsetting this, it had CA$14.7m in cash and CA$89.9m in receivables that were due within 12 months. So its liabilities total CA$224.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$148.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Canfor Pulp Products would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Canfor Pulp Products can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Canfor Pulp Products had a loss before interest and tax, and actually shrunk its revenue by 5.2%, to CA$1.1b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Canfor Pulp Products produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$50m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$67m over the last twelve months. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Canfor Pulp Products's profit, revenue, and operating cashflow have changed over the last few years.

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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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.