We Think Canfor Pulp Products (TSE:CFX) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Pulp Products Inc. (TSE:CFX) does use debt in its business. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Canfor Pulp Products

What Is Canfor Pulp Products's Debt?

You can click the graphic below for the historical numbers, but it shows that Canfor Pulp Products had CA$50.0m of debt in March 2022, down from CA$65.0m, one year before. On the flip side, it has CA$14.2m in cash leading to net debt of about CA$35.8m.

How Healthy Is Canfor Pulp Products' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Canfor Pulp Products had liabilities of CA$160.7m due within 12 months and liabilities of CA$187.1m due beyond that. On the other hand, it had cash of CA$14.2m and CA$86.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$247.4m.

This deficit is considerable relative to its market capitalization of CA$367.3m, so it does suggest shareholders should keep an eye on Canfor Pulp Products' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Canfor Pulp Products reported revenue of CA$1.1b, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Canfor Pulp Products produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$3.2m 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. For example, we would not want to see a repeat of last year's loss of CA$73m. In the meantime, we consider the stock very risky. 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. For instance, we've identified 1 warning sign for Canfor Pulp Products that you should be aware of.

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.