Bavarian Nordic (CPH:BAVA) Has Debt But No Earnings; Should You Worry?

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 note that Bavarian Nordic A/S (CPH:BAVA) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bavarian Nordic

What Is Bavarian Nordic's Net Debt?

As you can see below, at the end of June 2022, Bavarian Nordic had kr.892.2m of debt, up from kr.702.0m a year ago. Click the image for more detail. But it also has kr.3.25b in cash to offset that, meaning it has kr.2.36b net cash.

How Healthy Is Bavarian Nordic's Balance Sheet?

According to the last reported balance sheet, Bavarian Nordic had liabilities of kr.2.20b due within 12 months, and liabilities of kr.2.95b due beyond 12 months. On the other hand, it had cash of kr.3.25b and kr.526.0m worth of receivables due within a year. So it has liabilities totalling kr.1.37b more than its cash and near-term receivables, combined.

Since publicly traded Bavarian Nordic shares are worth a total of kr.16.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, 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 9.3%, to kr.1.8b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Bavarian Nordic?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Bavarian Nordic had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr.1.3b and booked a kr.693m accounting loss. Given it only has net cash of kr.2.36b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Bavarian Nordic (including 1 which can't be ignored) .

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.