Health Check: How Prudently Does Canfor Pulp Products (TSE:CFX) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Canfor Pulp Products Inc. (TSE:CFX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Canfor Pulp Products

What Is Canfor Pulp Products's Debt?

As you can see below, at the end of September 2023, Canfor Pulp Products had CA$81.1m of debt, up from CA$65.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$8.60m, its net debt is less, at about CA$72.5m.

A Look At Canfor Pulp Products' Liabilities

According to the last reported balance sheet, Canfor Pulp Products had liabilities of CA$220.4m due within 12 months, and liabilities of CA$81.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$8.60m as well as receivables valued at CA$57.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$235.8m.

The deficiency here weighs heavily on the CA$109.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Canfor Pulp Products had a loss before interest and tax, and actually shrunk its revenue by 11%, to CA$950m. We would much prefer see growth.

Caveat Emptor

Not only did Canfor Pulp Products's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$148m. 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 burned through CA$12m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that Canfor Pulp Products is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.