Does Evergreen Steel (TWSE:2211) Have A Healthy Balance Sheet?

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.' 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. Importantly, Evergreen Steel Corp. (TWSE:2211) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Evergreen Steel

What Is Evergreen Steel's Debt?

The image below, which you can click on for greater detail, shows that Evergreen Steel had debt of NT$2.78b at the end of June 2024, a reduction from NT$3.17b over a year. However, its balance sheet shows it holds NT$5.30b in cash, so it actually has NT$2.52b net cash.

A Look At Evergreen Steel's Liabilities

We can see from the most recent balance sheet that Evergreen Steel had liabilities of NT$8.21b falling due within a year, and liabilities of NT$3.13b due beyond that. Offsetting this, it had NT$5.30b in cash and NT$5.48b in receivables that were due within 12 months. So it has liabilities totalling NT$566.9m more than its cash and near-term receivables, combined.

This state of affairs indicates that Evergreen Steel's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$52.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Evergreen Steel boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Evergreen Steel grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Evergreen Steel will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Evergreen Steel 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. Looking at the most recent three years, Evergreen Steel recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Evergreen Steel has NT$2.52b in net cash. And it also grew its EBIT by 6.3% over the last year. So we don't have any problem with Evergreen Steel's use of debt. 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. Case in point: We've spotted 1 warning sign for Evergreen Steel you should be aware of.

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.