Is Evergreen Fibreboard Berhad (KLSE:EVERGRN) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Evergreen Fibreboard Berhad (KLSE:EVERGRN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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.

View our latest analysis for Evergreen Fibreboard Berhad

What Is Evergreen Fibreboard Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Evergreen Fibreboard Berhad had RM256.4m of debt, an increase on RM218.1m, over one year. However, it does have RM117.5m in cash offsetting this, leading to net debt of about RM138.9m.

How Healthy Is Evergreen Fibreboard Berhad's Balance Sheet?

According to the last reported balance sheet, Evergreen Fibreboard Berhad had liabilities of RM289.0m due within 12 months, and liabilities of RM118.7m due beyond 12 months. On the other hand, it had cash of RM117.5m and RM124.7m worth of receivables due within a year. So its liabilities total RM165.4m more than the combination of its cash and short-term receivables.

Evergreen Fibreboard Berhad has a market capitalization of RM376.4m, so it could very likely raise cash to ameliorate 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. There's no doubt that we learn most about debt from the balance sheet. 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 12%, to RM867m. That's not what we would hope to see.

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. To be specific the EBIT loss came in at RM35m. 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. Another cause for caution is that is bled RM17m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Evergreen Fibreboard Berhad has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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