Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Novavax, Inc. (NASDAQ:NVAX) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. 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.
What Is Novavax’s Debt?
The chart below, which you can click on for greater detail, shows that Novavax had US$322.7m in debt in June 2021; about the same as the year before. But it also has US$2.07b in cash to offset that, meaning it has US$1.75b net cash.
How Strong Is Novavax’s Balance Sheet?
According to the last reported balance sheet, Novavax had liabilities of US$1.65b due within 12 months, and liabilities of US$352.5m due beyond 12 months. On the other hand, it had cash of US$2.07b and US$71.4m worth of receivables due within a year. So it can boast US$142.2m more liquid assets than total liabilities.
Having regard to Novavax’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$17.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Novavax boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Novavax can strengthen its balance sheet over time.
Over 12 months, Novavax reported revenue of US$1.2b, which is a gain of 2,253%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!
So How Risky Is Novavax?
While Novavax lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$593m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. We think its revenue growth of 2,253% is a good sign. There’s no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt.