Is Canfor Pulp Products (TSE:CFX) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Canfor Pulp Products

What Is Canfor Pulp Products's Debt?

As you can see below, at the end of June 2024, Canfor Pulp Products had CA$103.0m of debt, up from CA$55.0m a year ago. Click the image for more detail. However, it also had CA$24.0m in cash, and so its net debt is CA$79.0m.

A Look At Canfor Pulp Products' Liabilities

The latest balance sheet data shows that Canfor Pulp Products had liabilities of CA$248.8m due within a year, and liabilities of CA$64.9m falling due after that. Offsetting these obligations, it had cash of CA$24.0m as well as receivables valued at CA$55.5m due within 12 months. So it has liabilities totalling CA$234.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$60.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Canfor Pulp Products would likely require a major re-capitalisation if it had to pay its creditors today. 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.

Over 12 months, Canfor Pulp Products made a loss at the EBIT level, and saw its revenue drop to CA$825m, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While Canfor Pulp Products's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$82m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CA$27m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Canfor Pulp Products (1 is significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.