Howard Marx put it well when he said that, instead of worrying about stock price volatility, ‘the potential for permanent loss is the risk I worry about … and about which every practical investor’. I know.’ So it seems that Smart Money knows that debt — which is usually involved in bankruptcy — is a very important factor when you assess how risky a company is. we note that Evergreen Gaming Corporation (CVE: TNA) has debt on its balance sheet. But the more important question is, how much risk is the debt posing?
Why does credit bring risk?
Loans are a tool to help businesses grow, but if a business is unable to pay its lenders, it lies at their mercy. Part and parcel of capitalism is a process of ‘creative destruction’ where failing businesses are mercilessly destroyed by their bankers. While this is not very common, we often see indebted companies permanently undermining shareholders as lenders force them to raise capital at a distress cost. Having said that, the most common situation is one where a company manages its debt appropriately – and for its own benefit. 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 Gaming
How much debt does Evergreen Gaming have?
As you can see below, at the end of March 2022, Evergreen Gaming had US$10.5m in debt, up from US$9.54m a year earlier. Click on image for more details. However, its balance sheet shows that it has US$28.6m in cash, so it actually has US$18.0m in net cash.
How strong is Evergreen Gaming’s balance sheet?
We can see from the most recent balance sheet that Evergreen Gaming had liabilities falling US$10.6m within a year, and liabilities of US$9.27m after that. Meeting these obligations, it had US$28.6m in cash as well as receivables worth US$1.16m within 12 months. So it’s actually US$9.85m . Is More liquid assets as compared to total liabilities.
This surplus suggests that Evergreen Gaming is using debt in a way that appears to be both safe and conservative. Since it has a lot of assets, it is unlikely to cause trouble with lenders. In short, Evergreen Gaming boasts of pure cash, so it’s fair to say that it doesn’t have a huge debt burden!
Although Evergreen Gaming posted losses on EBIT levels last year, it was also good to see that it generated US$11m in EBIT over the past twelve months. The balance sheet is clearly an area of focus when you’re analyzing debt. But it’s Evergreen Gaming’s earnings that will affect how the balance sheet pans out in the future. So if you are interested in knowing more about its earnings, it might be worth taking a look at this graph of its long-term earnings trend.
Lastly, a company can pay off debt only with cold hard cash and not accounting for profits. While Evergreen Gaming has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand why it How quickly is building (or destroying). balance. Happily for any shareholder, Evergreen Gaming actually produced more free cash flow than EBIT over the past year. When it comes to staying in the good qualities of your lenders there is nothing better than the cash coming in.
While it is always prudent to check the company’s debt, in this case Evergreen Gaming has US$18.0m in net cash and a good looking balance sheet. And it impacted us with free cash flow of US$13m, which is 112% of its EBIT. So is Evergreen Gaming’s debt a risk? We don’t think so. There is no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For example, Evergreen Gaming is 2 warning signs (and 1 which is potentially serious) We think you should be aware of this.
If, after all, you’re more interested in a fast-growing company with a rock-solid balance sheet, check out our list of net cash growth stocks without delay.
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This article by Simple Wall St. is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analytics powered by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative content. Simple Wall St does not have a position in any of the stocks mentioned.
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