Is Novavax (NASDAQ:NVAX) Using Debt In A Risky Way?

Warren Buffett famously said, '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. Importantly, Novavax, Inc. (NASDAQ:NVAX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Novavax

What Is Novavax's Net Debt?

The chart below, which you can click on for greater detail, shows that Novavax had US$323.8m in debt in March 2022; about the same as the year before. However, its balance sheet shows it holds US$1.57b in cash, so it actually has US$1.25b net cash.

How Strong Is Novavax's Balance Sheet?

We can see from the most recent balance sheet that Novavax had liabilities of US$2.26b falling due within a year, and liabilities of US$508.5m due beyond that. Offsetting this, it had US$1.57b in cash and US$478.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$720.4m.

Of course, Novavax has a market capitalization of US$4.02b, 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, Novavax also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Novavax'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.

Over 12 months, Novavax reported revenue of US$1.4b, which is a gain of 53%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Novavax?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Novavax had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$489m and booked a US$1.3b accounting loss. However, it has net cash of US$1.25b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Novavax may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Novavax (at least 1 which is concerning) , 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.