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, Vaxcyte, Inc. (NASDAQ:PCVX) does carry debt. But is this debt a concern to shareholders?
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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Vaxcyte's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2023 Vaxcyte had US$29.2m of debt, an increase on none, over one year. However, it does have US$1.08b in cash offsetting this, leading to net cash of US$1.05b.
How Strong Is Vaxcyte's Balance Sheet?
According to the last reported balance sheet, Vaxcyte had liabilities of US$145.3m due within 12 months, and liabilities of US$22.1m due beyond 12 months. Offsetting this, it had US$1.08b in cash and US$3.61m in receivables that were due within 12 months. So it actually has US$916.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Vaxcyte could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vaxcyte boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Vaxcyte's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Since Vaxcyte doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Vaxcyte?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Vaxcyte lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$365m of cash and made a loss of US$437m. While this does make the company a bit risky, it's important to remember it has net cash of US$1.05b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Vaxcyte (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.