Does Bavarian Nordic (CPH:BAVA) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Bavarian Nordic A/S (CPH:BAVA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Bavarian Nordic

What Is Bavarian Nordic's Net Debt?

The image below, which you can click on for greater detail, shows that Bavarian Nordic had debt of kr.16.1m at the end of June 2024, a reduction from kr.18.0m over a year. But on the other hand it also has kr.2.24b in cash, leading to a kr.2.22b net cash position.

How Healthy Is Bavarian Nordic's Balance Sheet?

We can see from the most recent balance sheet that Bavarian Nordic had liabilities of kr.3.65b falling due within a year, and liabilities of kr.188.3m due beyond that. On the other hand, it had cash of kr.2.24b and kr.1.10b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.498.8m.

Of course, Bavarian Nordic has a market capitalization of kr.13.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Bavarian Nordic boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Bavarian Nordic grew its EBIT by 12% last year, making its debt load easier to handle. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last two years, Bavarian Nordic actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bavarian Nordic has kr.2.22b in net cash. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with Bavarian Nordic's debt use. 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. For instance, we've identified 4 warning signs for Bavarian Nordic that you should be aware of.

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.