Would Evergreen Fibreboard Berhad (KLSE:EVERGRN) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Evergreen Fibreboard Berhad (KLSE:EVERGRN) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Evergreen Fibreboard Berhad

How Much Debt Does Evergreen Fibreboard Berhad Carry?

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 also had RM117.5m in cash, and so its net debt is RM138.9m.

How Healthy Is Evergreen Fibreboard Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Evergreen Fibreboard Berhad had liabilities of RM289.0m due within 12 months and liabilities of RM118.7m due beyond that. Offsetting these obligations, it had cash of RM117.5m as well as receivables valued at RM124.7m due within 12 months. So its liabilities total RM165.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Evergreen Fibreboard Berhad has a market capitalization of RM380.6m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Evergreen Fibreboard Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Evergreen Fibreboard Berhad made a loss at the EBIT level, and saw its revenue drop to RM867m, which is a fall of 12%. 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. 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 instance, we've identified 1 warning sign for Evergreen Fibreboard Berhad that 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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