Is Mersana Therapeutics (NASDAQ:MRSN) A Risky Investment?

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.' 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 note that Mersana Therapeutics, Inc. (NASDAQ:MRSN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mersana Therapeutics

How Much Debt Does Mersana Therapeutics Carry?

The chart below, which you can click on for greater detail, shows that Mersana Therapeutics had US$4.98m in debt in December 2020; about the same as the year before. However, it does have US$255.1m in cash offsetting this, leading to net cash of US$250.1m.

A Look At Mersana Therapeutics' Liabilities

The latest balance sheet data shows that Mersana Therapeutics had liabilities of US$30.0m due within a year, and liabilities of US$15.3m falling due after that. Offsetting these obligations, it had cash of US$255.1m as well as receivables valued at US$298.0k due within 12 months. So it can boast US$210.1m more liquid assets than total liabilities.

It's good to see that Mersana Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Mersana Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mersana 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.

In the last year Mersana Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 98%, to US$828k. To be frank that doesn't bode well.

So How Risky Is Mersana Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Mersana Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$75m and booked a US$88m accounting loss. But at least it has US$250.1m on the balance sheet to spend on growth, near-term. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Mersana Therapeutics (of which 3 make us uncomfortable!) you should know about.

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. 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.
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