Evergreen Fibreboard Berhad (KLSE:EVERGRN) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Evergreen Fibreboard Berhad (KLSE:EVERGRN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Evergreen Fibreboard Berhad

How Much Debt Does Evergreen Fibreboard Berhad Carry?

The image below, which you can click on for greater detail, shows that Evergreen Fibreboard Berhad had debt of RM139.5m at the end of June 2023, a reduction from RM190.2m over a year. However, because it has a cash reserve of RM113.4m, its net debt is less, at about RM26.1m.

A Look At Evergreen Fibreboard Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Evergreen Fibreboard Berhad had liabilities of RM266.3m due within 12 months and liabilities of RM58.5m due beyond that. Offsetting these obligations, it had cash of RM113.4m as well as receivables valued at RM120.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM91.1m.

This deficit isn't so bad because Evergreen Fibreboard Berhad is worth RM283.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Evergreen Fibreboard Berhad 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 Evergreen Fibreboard Berhad had a loss before interest and tax, and actually shrunk its revenue by 25%, to RM859m. That makes us nervous, to say the least.

Caveat Emptor

While Evergreen Fibreboard Berhad'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 RM40m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM77m. In the meantime, we consider the stock very risky. 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 example, we've discovered 1 warning sign for Evergreen Fibreboard Berhad 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.