These 4 metrics indicate that Dynavax Technologies (NASDAQ: DVAX) is using debt reasonably well
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but suffering a permanent loss of capital.” . So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Dynavax Technologies Company (NASDAQ: DVAX) uses debt in its business. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Dynavax Technologies
What is Dynavax Technologies’ net debt?
The image below, which you can click for more details, shows that in June 2021, Dynavax Technologies had a debt of US $ 220.0 million, compared to US $ 179.7 million in one year. But it also has $ 345.8 million in cash to make up for that, which means it has $ 125.8 million in net cash.
How healthy is Dynavax Technologies’ balance sheet?
According to the latest published balance sheet, Dynavax Technologies had liabilities of US $ 204.6 million due within 12 months and liabilities of US $ 359.9 million due beyond 12 months. On the other hand, it had US $ 345.8 million in cash and US $ 105.9 million in receivables due within one year. Its liabilities therefore total $ 112.8 million more than the combination of its cash and short-term receivables.
Of course, Dynavax Technologies has a market cap of US $ 1.93 billion, so this liability is likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While it has some liabilities to note, Dynavax Technologies also has more cash than debt, so we’re pretty confident that it can handle its debt safely.
Notably, Dynavax Technologies recorded a loss in EBIT last year, but improved it to a positive EBIT of US $ 13 million in the last twelve months. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Dynavax Technologies’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. While Dynavax Technologies has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past year, Dynavax Technologies has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that Dynavax Technologies has $ 125.8 million in net cash. And he impressed us with free cash flow of US $ 101 million, or 800% of his EBIT. We are therefore not concerned with the use of debt by Dynavax Technologies. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Example: we have spotted 3 warning signs for Dynavax Technologies you need to be aware of it, and one of them is a little rude.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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