Is GreenFirst Forest Products (TSE:GFP) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies GreenFirst Forest Products Inc. (TSE:GFP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GreenFirst Forest Products

What Is GreenFirst Forest Products's Debt?

As you can see below, GreenFirst Forest Products had CA$15.3m of debt at December 2024, down from CA$24.2m a year prior. But it also has CA$27.8m in cash to offset that, meaning it has CA$12.5m net cash.

A Look At GreenFirst Forest Products' Liabilities

The latest balance sheet data shows that GreenFirst Forest Products had liabilities of CA$52.6m due within a year, and liabilities of CA$22.3m falling due after that. On the other hand, it had cash of CA$27.8m and CA$16.2m worth of receivables due within a year. So its liabilities total CA$30.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since GreenFirst Forest Products has a market capitalization of CA$100.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, GreenFirst Forest Products boasts net cash, so it's fair to say it does not have a heavy debt load!

Although GreenFirst Forest Products made a loss at the EBIT level, last year, it was also good to see that it generated CA$195k in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is GreenFirst Forest Products's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While GreenFirst Forest Products has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, GreenFirst Forest Products saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although GreenFirst Forest Products's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$12.5m. So while GreenFirst Forest Products does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for GreenFirst Forest Products (2 make us uncomfortable) 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.