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.’ 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. Importantly, BiondVax Pharmaceuticals Ltd. (NASDAQ:BVXV) does carry debt. 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 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, 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.
How Much Debt Does BiondVax Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that BiondVax Pharmaceuticals had ₪62.3m of debt in March 2021, down from ₪131.3m, one year before. On the flip side, it has ₪48.6m in cash leading to net debt of about ₪13.8m.
A Look At BiondVax Pharmaceuticals’ Liabilities
According to the last reported balance sheet, BiondVax Pharmaceuticals had liabilities of ₪66.7m due within 12 months, and liabilities of ₪7.21m due beyond 12 months. Offsetting this, it had ₪48.6m in cash and ₪481.0k in receivables that were due within 12 months. So it has liabilities totalling ₪24.9m more than its cash and near-term receivables, combined.
BiondVax Pharmaceuticals has a market capitalization of ₪112.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
BiondVax Pharmaceuticals has a very low debt to EBITDA ratio of 0.62 so it is strange to see weak interest coverage, with last year’s EBIT being only 1.1 times the interest expense. So one way or the other, it’s clear the debt levels are not trivial. We also note that BiondVax Pharmaceuticals improved its EBIT from a last year’s loss to a positive ₪21m. When analysing debt levels, the balance sheet is the obvious place to start. But it is BiondVax Pharmaceuticals’s earnings that will influence how the balance sheet holds up in the future. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, BiondVax Pharmaceuticals saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Both BiondVax Pharmaceuticals’s conversion of EBIT to free cash flow and its interest cover were discouraging. But at least its net debt to EBITDA is a gleaming silver lining to those clouds. Taking the abovementioned factors together we do think BiondVax Pharmaceuticals’s debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt.