Is Western Forest Products (TSE:WEF) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Western Forest Products Inc. (TSE:WEF) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Western Forest Products

How Much Debt Does Western Forest Products Carry?

As you can see below, at the end of September 2024, Western Forest Products had CA$91.4m of debt, up from CA$62.5m a year ago. Click the image for more detail. However, it also had CA$5.00m in cash, and so its net debt is CA$86.4m.

A Look At Western Forest Products' Liabilities

According to the last reported balance sheet, Western Forest Products had liabilities of CA$104.8m due within 12 months, and liabilities of CA$223.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$5.00m as well as receivables valued at CA$66.7m due within 12 months. So it has liabilities totalling CA$256.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$121.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Western Forest Products would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Western Forest 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, Western Forest Products made a loss at the EBIT level, and saw its revenue drop to CA$1.0b, which is a fall of 2.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Western Forest Products produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$61m at the EBIT level. 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$45m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Western Forest Products that you should be aware of before investing here.

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.