Is Mersana Therapeutics (NASDAQ:MRSN) Using Debt Sensibly?

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. Importantly, Mersana Therapeutics, Inc. (NASDAQ:MRSN) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See 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$25.4m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds US$162.7m in cash, so it actually has US$137.4m net cash.

A Look At Mersana Therapeutics' Liabilities

We can see from the most recent balance sheet that Mersana Therapeutics had liabilities of US$62.2m falling due within a year, and liabilities of US$108.5m due beyond that. Offsetting these obligations, it had cash of US$162.7m as well as receivables valued at US$1.57m due within 12 months. So it has liabilities totalling US$6.39m more than its cash and near-term receivables, combined.

Given Mersana Therapeutics has a market capitalization of US$287.1m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mersana Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 23%, to US$30m. That makes us nervous, to say the least.

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 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$134m and booked a US$105m accounting loss. However, it has net cash of US$137.4m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mersana Therapeutics is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.