Eve Holding (NYSE:EVEX) Has Debt But No Earnings; Should You Worry?

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.' 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, Eve Holding, Inc. (NYSE:EVEX) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Eve Holding

How Much Debt Does Eve Holding Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Eve Holding had debt of US$11.3m, up from none in one year. However, its balance sheet shows it holds US$174.5m in cash, so it actually has US$163.2m net cash.

How Healthy Is Eve Holding's Balance Sheet?

We can see from the most recent balance sheet that Eve Holding had liabilities of US$46.2m falling due within a year, and liabilities of US$13.3m due beyond that. On the other hand, it had cash of US$174.5m and US$83.4m worth of receivables due within a year. So it actually has US$198.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Eve Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Eve Holding has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eve Holding'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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Eve Holding can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Eve Holding?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Eve Holding had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$91m of cash and made a loss of US$108m. But at least it has US$163.2m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Eve Holding is showing 3 warning signs in our investment analysis , and 2 of those are concerning...

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.

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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.