Is Targovax (OB:TRVX) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Targovax ASA (OB:TRVX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Targovax

What Is Targovax's Debt?

As you can see below, Targovax had kr57.1m of debt at March 2021, down from kr64.0m a year prior. However, it does have kr95.5m in cash offsetting this, leading to net cash of kr38.4m.

How Strong Is Targovax's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Targovax had liabilities of kr19.9m due within 12 months and liabilities of kr115.7m due beyond that. On the other hand, it had cash of kr95.5m and kr4.57m worth of receivables due within a year. So it has liabilities totalling kr35.6m more than its cash and near-term receivables, combined.

Given Targovax has a market capitalization of kr693.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Targovax 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 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?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Targovax had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr100m of cash and made a loss of kr105m. However, it has net cash of kr38.4m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. For example Targovax has 6 warning signs (and 3 which can't be ignored) we think you should know about.

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. 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.
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