Health Check: How Prudently Does MorphoSys (ETR:MOR) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that MorphoSys AG (ETR:MOR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MorphoSys

What Is MorphoSys's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 MorphoSys had €281.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds €1.16b in cash, so it actually has €874.0m net cash.

A Look At MorphoSys' Liabilities

We can see from the most recent balance sheet that MorphoSys had liabilities of €259.1m falling due within a year, and liabilities of €2.03b due beyond that. Offsetting these obligations, it had cash of €1.16b as well as receivables valued at €82.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.05b.

This deficit is considerable relative to its market capitalization of €1.13b, so it does suggest shareholders should keep an eye on MorphoSys' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, MorphoSys also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, MorphoSys made a loss at the EBIT level, and saw its revenue drop to €163m, which is a fall of 46%. That makes us nervous, to say the least.

So How Risky Is MorphoSys?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MorphoSys had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €423m of cash and made a loss of €150m. With only €874.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that MorphoSys is showing 3 warning signs in our investment analysis , you should know about...

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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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.