David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Savara Inc. (NASDAQ:SVRA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Savara's Debt?
The chart below, which you can click on for greater detail, shows that Savara had US$25.5m in debt in September 2021; about the same as the year before. But on the other hand it also has US$170.9m in cash, leading to a US$145.4m net cash position.
A Look At Savara's Liabilities
According to the last reported balance sheet, Savara had liabilities of US$10.7m due within 12 months, and liabilities of US$21.4m due beyond 12 months. Offsetting this, it had US$170.9m in cash and US$1.21m in receivables that were due within 12 months. So it can boast US$140.1m more liquid assets than total liabilities.
This surplus strongly suggests that Savara 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. Succinctly put, Savara boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Savara 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.
Given its lack of meaningful operating revenue, Savara shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is Savara?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Savara had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$43m of cash and made a loss of US$45m. However, it has net cash of US$145.4m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Savara (2 make us uncomfortable!) that you should be aware of before investing here.
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.
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.