We Think EVA Airways (TWSE:2618) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies EVA Airways Corp. (TWSE:2618) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, 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?

As you can see below, EVA Airways had NT$49.3b of debt at March 2024, down from NT$72.4b a year prior. However, it does have NT$81.4b in cash offsetting this, leading to net cash of NT$32.1b.

A Look At EVA Airways' Liabilities

We can see from the most recent balance sheet that EVA Airways had liabilities of NT$102.4b falling due within a year, and liabilities of NT$128.3b due beyond that. Offsetting these obligations, it had cash of NT$81.4b as well as receivables valued at NT$14.4b due within 12 months. So it has liabilities totalling NT$135.0b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$186.6b. 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!

Even more impressive was the fact that EVA Airways grew its EBIT by 152% over twelve months. 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'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. Over the last three years, EVA Airways actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$32.1b. The cherry on top was that in converted 239% of that EBIT to free cash flow, bringing in NT$44b. 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. Case in point: We've spotted 2 warning signs for EVA Airways you should be aware of, and 1 of them is a bit concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com