Is EVA Airways (TWSE:2618) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies EVA Airways Corp. (TWSE:2618) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See 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 EVA Airways had debt of NT$48.7b at the end of December 2023, a reduction from NT$76.3b over a year. However, it does have NT$68.8b in cash offsetting this, leading to net cash of NT$20.2b.

A Look At EVA Airways' Liabilities

We can see from the most recent balance sheet that EVA Airways had liabilities of NT$86.3b falling due within a year, and liabilities of NT$126.9b due beyond that. On the other hand, it had cash of NT$68.8b and NT$13.0b worth of receivables due within a year. So it has liabilities totalling NT$131.3b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$169.6b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, EVA Airways boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, EVA Airways grew its EBIT by 202% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

Summing Up

Although EVA Airways's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$20.2b. And it impressed us with free cash flow of NT$63b, being 291% of its EBIT. So is EVA Airways'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for EVA Airways you should be aware of, and 1 of them is a bit unpleasant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.