Is Seres Therapeutics (NASDAQ:MCRB) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Seres Therapeutics, Inc. (NASDAQ:MCRB) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Seres Therapeutics

What Is Seres Therapeutics's Debt?

As you can see below, at the end of March 2022, Seres Therapeutics had US$50.4m of debt, up from US$25.2m a year ago. Click the image for more detail. But it also has US$248.0m in cash to offset that, meaning it has US$197.6m net cash.

How Strong Is Seres Therapeutics' Balance Sheet?

According to the last reported balance sheet, Seres Therapeutics had liabilities of US$82.4m due within 12 months, and liabilities of US$156.6m due beyond 12 months. Offsetting these obligations, it had cash of US$248.0m as well as receivables valued at US$1.25m due within 12 months. So it can boast US$10.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Seres Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Seres Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Seres Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Seres Therapeutics reported revenue of US$141m, which is a gain of 358%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Seres Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Seres Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$41m and booked a US$87m accounting loss. But at least it has US$197.6m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Seres Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Seres Therapeutics that you should be aware of before investing here.

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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