Bavarian Nordic (CPH:BAVA) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Bavarian Nordic A/S (CPH:BAVA) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bavarian Nordic

What Is Bavarian Nordic's Debt?

You can click the graphic below for the historical numbers, but it shows that Bavarian Nordic had kr.16.6m of debt in March 2024, down from kr.18.5m, one year before. However, it does have kr.2.29b in cash offsetting this, leading to net cash of kr.2.28b.

A Look At Bavarian Nordic's Liabilities

Zooming in on the latest balance sheet data, we can see that Bavarian Nordic had liabilities of kr.2.94b due within 12 months and liabilities of kr.511.4m due beyond that. On the other hand, it had cash of kr.2.29b and kr.694.1m worth of receivables due within a year. So its liabilities total kr.459.5m more than the combination of its cash and short-term receivables.

Given Bavarian Nordic has a market capitalization of kr.14.7b, 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. While it does have liabilities worth noting, Bavarian Nordic also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Bavarian Nordic grew its EBIT by 243% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bavarian Nordic's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bavarian Nordic has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Bavarian Nordic recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bavarian Nordic has kr.2.28b in net cash. And it impressed us with its EBIT growth of 243% over the last year. So we don't have any problem with Bavarian Nordic's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Bavarian Nordic is showing 2 warning signs in our investment analysis , you should know about...

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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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.