Warren Buffett famously said, '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 note that Gevo, Inc. (NASDAQ:GEVO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

As you can see below, Gevo had US$66.8m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$245.7m in cash, leading to a US$178.9m net cash position.

How Healthy Is Gevo's Balance Sheet?

According to the last reported balance sheet, Gevo had liabilities of US$25.3m due within 12 months, and liabilities of US$69.9m due beyond 12 months. Offsetting these obligations, it had cash of US$245.7m as well as receivables valued at US$3.32m due within 12 months. So it can boast US$153.8m more liquid assets than total liabilities.

This luscious liquidity implies that Gevo's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Gevo has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gevo 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.

In the last year Gevo wasn't profitable at an EBIT level, but managed to grow its revenue by 98%, to US$18m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Gevo?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Gevo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$104m of cash and made a loss of US$74m. But at least it has US$178.9m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Gevo may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Gevo you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.