Does MorphoSys (ETR:MOR) Have A Healthy Balance Sheet?

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.' 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 can see that MorphoSys AG (ETR:MOR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for MorphoSys

What Is MorphoSys's Debt?

You can click the graphic below for the historical numbers, but it shows that MorphoSys had €239.4m of debt in March 2023, down from €286.2m, one year before. However, its balance sheet shows it holds €791.5m in cash, so it actually has €552.1m net cash.

How Strong Is MorphoSys' Balance Sheet?

According to the last reported balance sheet, MorphoSys had liabilities of €263.9m due within 12 months, and liabilities of €1.87b due beyond 12 months. Offsetting these obligations, it had cash of €791.5m as well as receivables valued at €78.1m due within 12 months. So it has liabilities totalling €1.26b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €765.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, MorphoSys would likely require a major re-capitalisation if it had to pay its creditors today. MorphoSys boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MorphoSys can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year MorphoSys wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to €299m. With any luck the company will be able to grow its way to profitability.

So How Risky Is MorphoSys?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that MorphoSys had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €309m of cash and made a loss of €73m. Given it only has net cash of €552.1m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, MorphoSys may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 2 warning signs with MorphoSys , 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.