Does EVA Airways (TWSE:2618) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that EVA Airways Corp. (TWSE:2618) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for EVA Airways

How Much Debt Does EVA Airways Carry?

The image below, which you can click on for greater detail, shows that at September 2024 EVA Airways had debt of NT$52.0b, up from NT$48.4b in one year. But it also has NT$77.5b in cash to offset that, meaning it has NT$25.5b net cash.

A Look At EVA Airways' Liabilities

According to the last reported balance sheet, EVA Airways had liabilities of NT$85.4b due within 12 months, and liabilities of NT$120.3b due beyond 12 months. Offsetting these obligations, it had cash of NT$77.5b as well as receivables valued at NT$14.7b due within 12 months. So it has liabilities totalling NT$113.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since EVA Airways has a market capitalization of NT$231.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, EVA Airways also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, EVA Airways grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine EVA Airways's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. EVA Airways 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. Happily for any shareholders, EVA Airways actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While EVA Airways does have more liabilities than liquid assets, it also has net cash of NT$25.5b. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in NT$26b. So we don't think EVA Airways's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for EVA Airways (1 is significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.