Seres Therapeutics (NASDAQ:MCRB) Has Debt But No Earnings; Should You Worry?

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 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. 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.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Seres Therapeutics

How Much Debt Does Seres Therapeutics Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Seres Therapeutics had US$100.7m of debt, an increase on US$50.6m, over one year. But it also has US$229.5m in cash to offset that, meaning it has US$128.8m net cash.

How Strong Is Seres Therapeutics' Balance Sheet?

According to the last reported balance sheet, Seres Therapeutics had liabilities of US$77.9m due within 12 months, and liabilities of US$305.9m due beyond 12 months. Offsetting these obligations, it had cash of US$229.5m as well as receivables valued at US$7.56m due within 12 months. So it has liabilities totalling US$146.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Seres Therapeutics is worth US$549.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Seres Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Seres Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to US$130m. That's not what we would hope to see.

So How Risky Is Seres Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Seres Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$250m of cash and made a loss of US$153m. However, it has net cash of US$128.8m, so it has a bit of time before it will need more capital. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Seres Therapeutics has 3 warning signs we think you should be aware of.

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.