Here's Why BiondVax Pharmaceuticals (NASDAQ:BVXV) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, BiondVax Pharmaceuticals Ltd. (NASDAQ:BVXV) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for BiondVax Pharmaceuticals

How Much Debt Does BiondVax Pharmaceuticals Carry?

As you can see below, at the end of June 2022, BiondVax Pharmaceuticals had ₪70.7m of debt, up from ₪64.2m a year ago. Click the image for more detail. However, it does have ₪39.5m in cash offsetting this, leading to net debt of about ₪31.2m.

How Healthy Is BiondVax Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that BiondVax Pharmaceuticals had liabilities of ₪23.5m due within a year, and liabilities of ₪57.6m falling due after that. Offsetting this, it had ₪39.5m in cash and ₪626.0k in receivables that were due within 12 months. So it has liabilities totalling ₪41.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪63.3m, so it does suggest shareholders should keep an eye on BiondVax Pharmaceuticals' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 BiondVax Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

It seems likely shareholders hope that BiondVax Pharmaceuticals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, BiondVax Pharmaceuticals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₪38m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₪30m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 6 warning signs with BiondVax Pharmaceuticals (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.