Health Check: How Prudently Does Targovax (OB:TRVX) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Targovax ASA (OB:TRVX) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Targovax

What Is Targovax's Net Debt?

The chart below, which you can click on for greater detail, shows that Targovax had kr55.2m in debt in March 2022; about the same as the year before. But it also has kr149.5m in cash to offset that, meaning it has kr94.3m net cash.

How Strong Is Targovax's Balance Sheet?

We can see from the most recent balance sheet that Targovax had liabilities of kr39.2m falling due within a year, and liabilities of kr102.8m due beyond that. On the other hand, it had cash of kr149.5m and kr11.1m worth of receivables due within a year. So it actually has kr18.5m more liquid assets than total liabilities.

This surplus suggests that Targovax has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Targovax has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Targovax'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.

Since Targovax doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Targovax?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Targovax had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr91m and booked a kr106m accounting loss. But at least it has kr94.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Targovax (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.