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. Importantly, Bavarian Nordic A/S (CPH:BAVA) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Bavarian Nordic's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Bavarian Nordic had ø410.7m of debt, an increase on ø649, over one year. But it also has ø1.50b in cash to offset that, meaning it has ø1.08b net cash.
How Healthy Is Bavarian Nordic's Balance Sheet?
The latest balance sheet data shows that Bavarian Nordic had liabilities of ø226.3m due within a year, and liabilities of ø444.8m falling due after that. On the other hand, it had cash of ø1.50b and ø73.0m worth of receivables due within a year. So it actually has ø897.5m more liquid assets than total liabilities.
This surplus suggests that Bavarian Nordic is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Bavarian Nordic 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 Bavarian Nordic can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Bavarian Nordic wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to ø554m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Bavarian Nordic?
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 Bavarian Nordic had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through ø645m of cash and made a loss of ø402m. But at least it has ø1.08b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Bavarian Nordic may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Bavarian Nordic I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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