Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 Gevo, Inc. (NASDAQ:GEVO) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Gevo’s Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Gevo had debt of US$66.7m, up from US$15.7m in one year. However, its balance sheet shows it holds US$264.0m in cash, so it actually has US$197.3m net cash.

How Strong Is Gevo’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gevo had liabilities of US$21.5m due within 12 months and liabilities of US$88.1m due beyond that. On the other hand, it had cash of US$264.0m and US$847.0k worth of receivables due within a year. So it can boast US$155.3m more liquid assets than total liabilities.

This surplus suggests that Gevo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gevo 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 Gevo can strengthen its balance sheet over time.

In the last year Gevo had a loss before interest and tax, and actually shrunk its revenue by 93%, to US$1.2m. To be frank that doesn’t bode well.

So How Risky Is Gevo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Gevo had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$46m of cash and made a loss of US$53m. Given it only has net cash of US$197.3m, the company may need to raise more capital if it doesn’t reach break-even 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.