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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Eve & Co Incorporated (CVE:EVE) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Eve & Co's Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Eve & Co had debt of CA$4.32m, up from CA$1.58m in one year. On the flip side, it has CA$1.04m in cash leading to net debt of about CA$3.28m.
A Look At Eve & Co's Liabilities
Zooming in on the latest balance sheet data, we can see that Eve & Co had liabilities of CA$4.73m due within 12 months and liabilities of CA$3.35m due beyond that. Offsetting this, it had CA$1.04m in cash and CA$2.60m in receivables that were due within 12 months. So it has liabilities totalling CA$4.43m more than its cash and near-term receivables, combined.
Given Eve & Co has a market capitalization of CA$85.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Eve & Co 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 it has no significant operating revenue at the moment, shareholders will be hoping Eve & Co can make progress and gain better traction for the business, before it runs low on cash.
Importantly, Eve & Co had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost CA$3.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$18m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Eve & Co insider transactions.
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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