Here's Why Mersana Therapeutics (NASDAQ:MRSN) Can Manage Its Debt Despite Losing Money

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Mersana Therapeutics, Inc. (NASDAQ:MRSN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mersana Therapeutics

What Is Mersana Therapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that Mersana Therapeutics had US$25.1m in debt in June 2023; about the same as the year before. However, it does have US$286.6m in cash offsetting this, leading to net cash of US$261.5m.

How Strong Is Mersana Therapeutics' Balance Sheet?

The latest balance sheet data shows that Mersana Therapeutics had liabilities of US$74.9m due within a year, and liabilities of US$146.3m falling due after that. Offsetting these obligations, it had cash of US$286.6m as well as receivables valued at US$30.0m due within 12 months. So it can boast US$95.4m more liquid assets than total liabilities.

This surplus strongly suggests that Mersana Therapeutics has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Mersana 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 ultimately the future profitability of the business will decide if Mersana Therapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Mersana Therapeutics reported revenue of US$39m, which is a gain of 510%, 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 Mersana Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Mersana Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$90m and booked a US$215m accounting loss. But at least it has US$261.5m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Mersana Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Mersana Therapeutics (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.