Is Savara (NASDAQ:SVRA) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Savara Inc. (NASDAQ:SVRA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Savara's Net Debt?

The chart below, which you can click on for greater detail, shows that Savara had US$25.9m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$142.6m in cash, so it actually has US$116.7m net cash.

How Strong Is Savara's Balance Sheet?

We can see from the most recent balance sheet that Savara had liabilities of US$3.71m falling due within a year, and liabilities of US$26.0m due beyond that. Offsetting these obligations, it had cash of US$142.6m as well as receivables valued at US$930.0k due within 12 months. So it can boast US$113.8m 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! 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 Savara'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.

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?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Savara had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$36m of cash and made a loss of US$39m. However, it has net cash of US$116.7m, 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 instance, we've identified 2 warning signs for Savara (1 makes us a bit uncomfortable) you should be aware of.

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.