Is Marinus Pharmaceuticals (NASDAQ:MRNS) Using Debt Sensibly?

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. We note that Marinus Pharmaceuticals, Inc. (NASDAQ:MRNS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Marinus Pharmaceuticals

What Is Marinus Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Marinus Pharmaceuticals had debt of US$105.5m, up from US$70.4m in one year. However, its balance sheet shows it holds US$175.3m in cash, so it actually has US$69.8m net cash.

How Healthy Is Marinus Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Marinus Pharmaceuticals had liabilities of US$25.6m due within 12 months and liabilities of US$118.3m due beyond that. Offsetting these obligations, it had cash of US$175.3m as well as receivables valued at US$5.23m due within 12 months. So it actually has US$36.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Marinus Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Marinus Pharmaceuticals 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 ultimately the future profitability of the business will decide if Marinus Pharmaceuticals 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, Marinus Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$26m, which is a fall of 6.0%. That's not what we would hope to see.

So How Risky Is Marinus Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Marinus Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$119m of cash and made a loss of US$28m. However, it has net cash of US$69.8m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Marinus Pharmaceuticals 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.

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.