Is Targovax (OB:TRVX) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Targovax ASA (OB:TRVX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Targovax

What Is Targovax's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Targovax had debt of kr61.1m, up from kr50.4m in one year. However, its balance sheet shows it holds kr122.3m in cash, so it actually has kr61.3m net cash.

A Look At Targovax's Liabilities

Zooming in on the latest balance sheet data, we can see that Targovax had liabilities of kr25.7m due within 12 months and liabilities of kr122.5m due beyond that. Offsetting this, it had kr122.3m in cash and kr4.86m in receivables that were due within 12 months. So it has liabilities totalling kr21.0m more than its cash and near-term receivables, combined.

Given Targovax has a market capitalization of kr803.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Targovax also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Targovax 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.

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 kr111m and booked a kr108m accounting loss. But at least it has kr61.3m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 7 warning signs for Targovax you should be aware of, and 3 of them can't be ignored.

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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