Health Check: How Prudently Does Molecular Templates (NASDAQ:MTEM) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Molecular Templates, Inc. (NASDAQ:MTEM) 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. 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.

See our latest analysis for Molecular Templates

What Is Molecular Templates's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Molecular Templates had debt of US$35.3m, up from US$14.8m in one year. But it also has US$169.4m in cash to offset that, meaning it has US$134.1m net cash.

How Healthy Is Molecular Templates' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Molecular Templates had liabilities of US$47.4m due within 12 months and liabilities of US$98.4m due beyond that. Offsetting this, it had US$169.4m in cash and US$234.0k in receivables that were due within 12 months. So it actually has US$23.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Molecular Templates could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Molecular Templates 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 it is future earnings, more than anything, that will determine Molecular Templates'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.

Over 12 months, Molecular Templates reported revenue of US$24m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Molecular Templates?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Molecular Templates had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$35m of cash and made a loss of US$101m. However, it has net cash of US$134.1m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example Molecular Templates has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

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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.