Is Evergreen Steel (TWSE:2211) A Risky Investment?

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. Importantly, Evergreen Steel Corp. (TWSE:2211) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Steel

What Is Evergreen Steel's Debt?

As you can see below, Evergreen Steel had NT$2.83b of debt at December 2023, down from NT$3.32b a year prior. However, it does have NT$6.30b in cash offsetting this, leading to net cash of NT$3.47b.

A Look At Evergreen Steel's Liabilities

We can see from the most recent balance sheet that Evergreen Steel had liabilities of NT$4.91b falling due within a year, and liabilities of NT$3.21b due beyond that. On the other hand, it had cash of NT$6.30b and NT$3.70b worth of receivables due within a year. So it actually has NT$1.88b more liquid assets than total liabilities.

This short term liquidity is a sign that Evergreen Steel could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Evergreen Steel has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Evergreen Steel has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Evergreen Steel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Evergreen Steel recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Evergreen Steel has net cash of NT$3.47b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 40% over the last year. So is Evergreen Steel's debt a risk? It doesn't seem so to us. 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. For example - Evergreen Steel has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.