The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Mersana Therapeutics, Inc. (NASDAQ:MRSN) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Mersana Therapeutics Carry?
The image below, which you can click on for greater detail, shows that at September 2019 Mersana Therapeutics had debt of US$4.84m, up from none in one year. However, it does have US$112.0m in cash offsetting this, leading to net cash of US$107.2m.
How Healthy Is Mersana Therapeutics’s Balance Sheet?
According to the last reported balance sheet, Mersana Therapeutics had liabilities of US$22.4m due within 12 months, and liabilities of US$6.23m due beyond 12 months. Offsetting this, it had US$112.0m in cash and US$298.0k in receivables that were due within 12 months. So it actually has US$83.7m more liquid assets than total liabilities.
This excess liquidity is a great indication that Mersana Therapeutics’s balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Mersana Therapeutics boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mersana Therapeutics’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.
In the last year Mersana Therapeutics wasn’t profitable at an EBIT level, but managed to grow its revenue by242%, to US$43m. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!
So How Risky Is Mersana Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Mersana Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$72m and booked a US$34m accounting loss. However, it has net cash of US$107.2m, so it has a bit of time before it will need more capital. The good news for shareholders is that Mersana Therapeutics has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like Mersana Therapeutics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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