Warren Buffett famously said, ‘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, Dynavax Technologies Corporation (NASDAQ:DVAX) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Dynavax Technologies’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Dynavax Technologies had US$176.6m of debt, an increase on US$99.8m, over one year. However, because it has a cash reserve of US$140.5m, its net debt is less, at about US$36.1m.
How Healthy Is Dynavax Technologies’s Balance Sheet?
The latest balance sheet data shows that Dynavax Technologies had liabilities of US$44.6m due within a year, and liabilities of US$211.9m falling due after that. Offsetting this, it had US$140.5m in cash and US$7.58m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$108.4m.
Dynavax Technologies has a market capitalization of US$368.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dynavax Technologies 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.
In the last year Dynavax Technologies wasn’t profitable at an EBIT level, but managed to grow its revenue by1297%, to US$21m. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!
Despite the top line growth, Dynavax Technologies still had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$145m. 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 US$166m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Dynavax Technologies insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.