Dynavax Technologies (NASDAQ:DVAX) Could Easily Take On More Debt

By
Simply Wall St
Published
May 10, 2022
NasdaqCM:DVAX
Source: Shutterstock

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.' 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. We can see that Dynavax Technologies Corporation (NASDAQ:DVAX) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dynavax Technologies

How Much Debt Does Dynavax Technologies Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Dynavax Technologies had debt of US$220.8m, up from US$179.9m in one year. However, it does have US$503.2m in cash offsetting this, leading to net cash of US$282.5m.

debt-equity-history-analysis
NasdaqCM:DVAX Debt to Equity History May 10th 2022

How Healthy Is Dynavax Technologies' Balance Sheet?

The latest balance sheet data shows that Dynavax Technologies had liabilities of US$466.2m due within a year, and liabilities of US$255.3m falling due after that. Offsetting this, it had US$503.2m in cash and US$207.8m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Dynavax Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Dynavax Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Dynavax Technologies turned things around in the last 12 months, delivering and EBIT of US$144m. 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 Dynavax Technologies'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dynavax Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Dynavax Technologies actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dynavax Technologies has US$282.5m in net cash. And it impressed us with free cash flow of US$238m, being 165% of its EBIT. So is Dynavax Technologies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Dynavax Technologies (at least 1 which is concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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