Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Evergreen Gaming Corporation (CVE:TNA) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Evergreen Gaming's Debt?
As you can see below, Evergreen Gaming had US$5.01m of debt at June 2019, down from US$5.71m a year prior. But it also has US$14.5m in cash to offset that, meaning it has US$9.53m net cash.
How Strong Is Evergreen Gaming's Balance Sheet?
The latest balance sheet data shows that Evergreen Gaming had liabilities of US$5.81m due within a year, and liabilities of US$5.24m falling due after that. Offsetting these obligations, it had cash of US$14.5m as well as receivables valued at US$54.3k due within 12 months. So it actually has US$3.54m more liquid assets than total liabilities.
This surplus suggests that Evergreen Gaming has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Evergreen Gaming boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Evergreen Gaming has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Evergreen Gaming 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Evergreen Gaming 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 last three years, Evergreen Gaming recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case Evergreen Gaming has US$9.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in US$5.9m. So is Evergreen Gaming's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Evergreen Gaming, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.