Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. As with many other companies BioNTech SE (NASDAQ:BNTX) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is BioNTech’s Debt?
As you can see below, at the end of September 2021, BioNTech had €157.5m of debt, up from €105.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds €2.39b in cash, so it actually has €2.24b net cash.
A Look At BioNTech’s Liabilities
The latest balance sheet data shows that BioNTech had liabilities of €4.90b due within a year, and liabilities of €618.5m falling due after that. Offsetting these obligations, it had cash of €2.39b as well as receivables valued at €10.6b due within 12 months. So it actually has €7.48b more liquid assets than total liabilities.
This surplus suggests that BioNTech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BioNTech has more cash than debt is arguably a good indication that it can manage its debt safely.
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 €10b. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BioNTech’s ability to maintain a healthy balance sheet going forward.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While BioNTech has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, BioNTech reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing up
While it is always sensible to investigate a company’s debt, in this case BioNTech has €2.24b in net cash and a decent-looking balance sheet. So we don’t have any problem with BioNTech’s use of debt. When analysing debt levels, the balance sheet is the obvious place to start.