Is Dynavax Technologies (NASDAQ:DVAX) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Dynavax Technologies Corporation (NASDAQ:DVAX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dynavax Technologies

How Much Debt Does Dynavax Technologies Carry?

The chart below, which you can click on for greater detail, shows that Dynavax Technologies had US$223.3m in debt in June 2024; about the same as the year before. However, it does have US$735.6m in cash offsetting this, leading to net cash of US$512.3m.

How Healthy Is Dynavax Technologies' Balance Sheet?

The latest balance sheet data shows that Dynavax Technologies had liabilities of US$62.2m due within a year, and liabilities of US$311.3m falling due after that. On the other hand, it had cash of US$735.6m and US$65.0m worth of receivables due within a year. So it actually has US$427.2m more liquid assets than total liabilities.

This surplus strongly suggests that Dynavax Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Dynavax Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 46%, to US$250m. To be frank that doesn't bode well.

So How Risky Is Dynavax Technologies?

While Dynavax Technologies lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$17m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dynavax Technologies 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. 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.