Is Evelo Biosciences (NASDAQ:EVLO) Weighed On By Its Debt Load?

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.' 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. We can see that Evelo Biosciences, Inc. (NASDAQ:EVLO) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 Evelo Biosciences

What Is Evelo Biosciences's Debt?

As you can see below, at the end of June 2021, Evelo Biosciences had US$46.5m of debt, up from US$19.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$123.3m in cash, so it actually has US$76.9m net cash.

How Healthy Is Evelo Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Evelo Biosciences had liabilities of US$19.8m falling due within a year, and liabilities of US$63.2m due beyond that. Offsetting these obligations, it had cash of US$123.3m as well as receivables valued at US$7.50m due within 12 months. So it actually has US$47.9m more liquid assets than total liabilities.

This surplus suggests that Evelo Biosciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Evelo Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Evelo Biosciences'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.

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 we do note that Evelo Biosciences had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$81m of cash and made a loss of US$110m. With only US$76.9m 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Evelo Biosciences (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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