Is MorphoSys (ETR:MOR) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that MorphoSys AG (ETR:MOR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for MorphoSys

What Is MorphoSys's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 MorphoSys had debt of €278.1m, up from none in one year. But on the other hand it also has €1.10b in cash, leading to a €817.3m net cash position.

A Look At MorphoSys' Liabilities

According to the last reported balance sheet, MorphoSys had liabilities of €204.6m due within 12 months, and liabilities of €771.5m due beyond 12 months. Offsetting this, it had €1.10b in cash and €108.2m in receivables that were due within 12 months. So it can boast €227.5m more liquid assets than total liabilities.

This surplus suggests that MorphoSys has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MorphoSys has more cash than debt is arguably a good indication that it can manage its debt safely. 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 MorphoSys's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, MorphoSys made a loss at the EBIT level, and saw its revenue drop to €143m, which is a fall of 51%. To be frank that doesn't bode well.

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. And over the same period it saw negative free cash outflow of €295m and booked a €103m accounting loss. Given it only has net cash of €817.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 3 warning signs for MorphoSys that you should be aware of before investing here.

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.
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