Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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, BioNTech SE (NASDAQ:BNTX) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is BioNTech’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 BioNTech had €159.1m of debt, an increase on €19.2m, over one year. However, its balance sheet shows it holds €914.9m in cash, so it actually has €755.8m net cash.
How Healthy Is BioNTech’s Balance Sheet?
The latest balance sheet data shows that BioNTech had liabilities of €3.16b due within a year, and liabilities of €502.7m falling due after that. On the other hand, it had cash of €914.9m and €7.05b worth of receivables due within a year. So it actually has €4.30b more liquid assets than total liabilities.
This short term liquidity is a sign that BioNTech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, BioNTech boasts net cash, so it’s fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, BioNTech turned things around in the last 12 months, delivering and EBIT of €5.5b. 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 BioNTech’s ability to maintain a healthy balance sheet going forward.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BioNTech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last year, BioNTech actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that BioNTech has net cash of €755.8m, as well as more liquid assets than liabilities. So we are not troubled with BioNTech’s debt use. When analysing debt levels, the balance sheet is the obvious place to start.
