Yahoo Finance Is Evergreen Gaming (CVE:TNA) A Risky Investment?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Evergreen Gaming Corporation (CVE:TNA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Carry?
As you can see below, at the end of March 2022, Evergreen Gaming had US$10.5m of debt, up from US$9.54m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$28.6m in cash, so it actually has US$18.0m net cash.
How Strong Is Evergreen Gaming's Balance Sheet?
We can see from the most recent balance sheet that Evergreen Gaming had liabilities of US$10.6m falling due within a year, and liabilities of US$9.27m due beyond that. Offsetting these obligations, it had cash of US$28.6m as well as receivables valued at US$1.16m due within 12 months. So it actually has US$9.85m more liquid assets than total liabilities.
This surplus suggests that Evergreen Gaming is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Evergreen Gaming boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Evergreen Gaming made a loss at the EBIT level, last year, it was also good to see that it generated US$11m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Evergreen Gaming's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting 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 tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Evergreen Gaming actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to investigate a company's debt, in this case Evergreen Gaming has US$18.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$13m, being 112% of its EBIT. So is Evergreen Gaming's debt a risk? It doesn't seem so to us. There's 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 has 2 warning signs (and 1 which is potentially serious) we think you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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