Here's Why Bavarian Nordic (CPH:BAVA) Can Manage Its Debt Responsibly

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 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.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bavarian Nordic

How Much Debt Does Bavarian Nordic Carry?

You can click the graphic below for the historical numbers, but it shows that Bavarian Nordic had kr.18.0m of debt in June 2023, down from kr.892.2m, one year before. But it also has kr.1.39b in cash to offset that, meaning it has kr.1.37b net cash.

A Look At Bavarian Nordic's Liabilities

We can see from the most recent balance sheet that Bavarian Nordic had liabilities of kr.2.93b falling due within a year, and liabilities of kr.2.38b due beyond that. Offsetting this, it had kr.1.39b in cash and kr.1.33b in receivables that were due within 12 months. So it has liabilities totalling kr.2.59b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Bavarian Nordic has a market capitalization of kr.11.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Bavarian Nordic boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Bavarian Nordic made a loss at the EBIT level, last year, it was also good to see that it generated kr.1.3b in EBIT over the last twelve months. 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'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. Bavarian Nordic may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Bavarian Nordic burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Bavarian Nordic's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr.1.37b. So we are not troubled with Bavarian Nordic's debt use. 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. For example, we've discovered 4 warning signs for Bavarian Nordic (2 are potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.