Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Eve Holding, Inc. (NYSE:EVEX) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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. But it also has US$174.5m in cash to offset that, meaning it has US$163.2m net cash.

How Healthy Is Eve Holding's Balance Sheet?

According to the last reported balance sheet, Eve Holding had liabilities of US$46.2m due within 12 months, and liabilities of US$13.3m due beyond 12 months. Offsetting these obligations, it had cash of US$174.5m as well as receivables valued at US$83.4m due within 12 months. So it can boast 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. Succinctly put, Eve Holding boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eve Holding 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.

It seems likely shareholders hope that Eve Holding can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Eve Holding?

Statistically speaking companies that lose money are riskier than those that make money. 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. However, it has net cash of US$163.2m, so it has a bit of time before it will need more capital. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Eve Holding you should be aware of, and 2 of them are concerning.

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.