Would MorphoSys (ETR:MOR) Be Better Off With Less Debt?

Warren Buffett famously said, '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. As with many other companies MorphoSys AG (ETR:MOR) makes use of debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MorphoSys

What Is MorphoSys's Debt?

As you can see below, MorphoSys had €1.68b of debt at December 2023, down from €1.79b a year prior. However, it does have €678.6m in cash offsetting this, leading to net debt of about €1.00b.

A Look At MorphoSys' Liabilities

The latest balance sheet data shows that MorphoSys had liabilities of €264.3m due within a year, and liabilities of €1.71b falling due after that. Offsetting this, it had €678.6m in cash and €42.7m in receivables that were due within 12 months. So it has liabilities totalling €1.26b more than its cash and near-term receivables, combined.

MorphoSys has a market capitalization of €2.47b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 €238m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

While MorphoSys's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €241m at the EBIT level. 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. Another cause for caution is that is bled €299m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 3 warning signs with MorphoSys (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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