Rock star Growth Puts Seres Therapeutics (NASDAQ:MCRB) In A Position To Use 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.' 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. As with many other companies Seres Therapeutics, Inc. (NASDAQ:MCRB) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Seres Therapeutics

What Is Seres Therapeutics's Debt?

The chart below, which you can click on for greater detail, shows that Seres Therapeutics had US$25.5m in debt in September 2021; about the same as the year before. However, it does have US$347.4m in cash offsetting this, leading to net cash of US$321.9m.

How Healthy Is Seres Therapeutics' Balance Sheet?

According to the last reported balance sheet, Seres Therapeutics had liabilities of US$94.6m due within 12 months, and liabilities of US$126.0m due beyond 12 months. On the other hand, it had cash of US$347.4m and US$1.25m worth of receivables due within a year. So it can boast US$128.1m more liquid assets than total liabilities.

This surplus suggests that Seres Therapeutics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Seres Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Seres Therapeutics 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, Seres Therapeutics reported revenue of US$155m, which is a gain of 567%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Seres Therapeutics?

Although Seres Therapeutics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$32m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 567% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.