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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mersana Therapeutics

How Much Debt Does Mersana Therapeutics Carry?

As you can see below, Mersana Therapeutics had US$25.0m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$273.9m in cash, so it actually has US$248.9m net cash.

How Strong Is Mersana Therapeutics' Balance Sheet?

The latest balance sheet data shows that Mersana Therapeutics had liabilities of US$83.4m due within a year, and liabilities of US$148.5m falling due after that. Offsetting these obligations, it had cash of US$273.9m as well as receivables valued at US$30.0m due within 12 months. So it can boast US$72.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Mersana Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mersana Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Mersana Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 1,464%, to US$32m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Mersana Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Mersana Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$73m and booked a US$213m accounting loss. But at least it has US$248.9m on the balance sheet to spend on growth, near-term. Importantly, Mersana Therapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Mersana Therapeutics (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.