Is Valneva (EPA:VLA) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Valneva SE (EPA:VLA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. 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 Valneva

What Is Valneva's Net Debt?

As you can see below, at the end of September 2023, Valneva had €140.9m of debt, up from €105.9m a year ago. Click the image for more detail. But on the other hand it also has €171.3m in cash, leading to a €30.4m net cash position.

How Healthy Is Valneva's Balance Sheet?

According to the last reported balance sheet, Valneva had liabilities of €218.2m due within 12 months, and liabilities of €144.9m due beyond 12 months. On the other hand, it had cash of €171.3m and €44.3m worth of receivables due within a year. So it has liabilities totalling €147.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Valneva has a market capitalization of €487.0m, 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, Valneva boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Valneva 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.

Over 12 months, Valneva made a loss at the EBIT level, and saw its revenue drop to €223m, which is a fall of 49%. That makes us nervous, to say the least.

So How Risky Is Valneva?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Valneva had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €208m and booked a €113m accounting loss. Given it only has net cash of €30.4m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Valneva has 2 warning signs we think you should be aware of.

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.