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 VBI Vaccines Inc. (NASDAQ:VBIV) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is VBI Vaccines's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 VBI Vaccines had US$29.9m of debt, an increase on US$27.5m, over one year. But it also has US$82.4m in cash to offset that, meaning it has US$52.5m net cash.
How Strong Is VBI Vaccines' Balance Sheet?
We can see from the most recent balance sheet that VBI Vaccines had liabilities of US$40.5m falling due within a year, and liabilities of US$26.1m due beyond that. Offsetting these obligations, it had cash of US$82.4m as well as receivables valued at US$2.45m due within 12 months. So it can boast US$18.3m more liquid assets than total liabilities.
This surplus suggests that VBI Vaccines has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that VBI Vaccines has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if VBI Vaccines can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, VBI Vaccines made a loss at the EBIT level, and saw its revenue drop to US$660k, which is a fall of 27%. To be frank that doesn't bode well.
So How Risky Is VBI Vaccines?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months VBI Vaccines lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$63m and booked a US$102m accounting loss. Given it only has net cash of US$52.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for VBI Vaccines you should be aware of, and 1 of them makes us a bit uncomfortable.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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