These 4 Measures Indicate That Dynavax Technologies (NASDAQ:DVAX) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dynavax Technologies Corporation (NASDAQ:DVAX) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dynavax Technologies

What Is Dynavax Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Dynavax Technologies had debt of US$220.0m, up from US$179.7m in one year. But it also has US$345.8m in cash to offset that, meaning it has US$125.8m net cash.

How Healthy Is Dynavax Technologies' Balance Sheet?

According to the last reported balance sheet, Dynavax Technologies had liabilities of US$204.6m due within 12 months, and liabilities of US$359.9m due beyond 12 months. On the other hand, it had cash of US$345.8m and US$105.9m worth of receivables due within a year. So its liabilities total US$112.8m more than the combination of its cash and short-term receivables.

Of course, Dynavax Technologies has a market capitalization of US$1.93b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Notably, Dynavax Technologies made a loss at the EBIT level, last year, but improved that to positive EBIT of US$13m in the last twelve months. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dynavax Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Dynavax Technologies actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dynavax Technologies has US$125.8m in net cash. And it impressed us with free cash flow of US$101m, being 800% of its EBIT. So we are not troubled with Dynavax Technologies's debt use. 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 3 warning signs for Dynavax Technologies you should be aware of, and 1 of them is a bit unpleasant.

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.

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.

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