Evelo Biosciences (NASDAQ:EVLO) Has Debt But No Earnings; Should You Worry?

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. We can see that Evelo Biosciences, Inc. (NASDAQ:EVLO) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Evelo Biosciences

What Is Evelo Biosciences's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Evelo Biosciences had US$46.5m of debt, an increase on US$29.9m, over one year. However, its balance sheet shows it holds US$95.9m in cash, so it actually has US$49.4m net cash.

How Strong Is Evelo Biosciences' Balance Sheet?

The latest balance sheet data shows that Evelo Biosciences had liabilities of US$20.7m due within a year, and liabilities of US$62.7m falling due after that. Offsetting this, it had US$95.9m in cash and US$7.50m in receivables that were due within 12 months. So it actually has US$20.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Evelo Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Evelo Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Evelo Biosciences can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, Evelo Biosciences shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Evelo Biosciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Evelo Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$90m of cash and made a loss of US$123m. With only US$49.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Evelo Biosciences you should be aware of, and 3 of them are a bit unpleasant.

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.