Does Mesoblast (ASX:MSB) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We note that Mesoblast Limited (ASX:MSB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Mesoblast

How Much Debt Does Mesoblast Carry?

As you can see below, Mesoblast had US$94.2m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$76.8m in cash offsetting this, leading to net debt of about US$17.4m.

How Strong Is Mesoblast's Balance Sheet?

The latest balance sheet data shows that Mesoblast had liabilities of US$52.2m due within a year, and liabilities of US$112.4m falling due after that. On the other hand, it had cash of US$76.8m and US$5.16m worth of receivables due within a year. So it has liabilities totalling US$82.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Mesoblast is worth US$398.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mesoblast 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.

In the last year Mesoblast wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to US$10.0m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Mesoblast's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$80m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$77m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Mesoblast .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.