Is Molecular Templates (NASDAQ:MTEM) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Molecular Templates, Inc. (NASDAQ:MTEM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Molecular Templates

What Is Molecular Templates's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Molecular Templates had US$14.8m of debt, an increase on US$3.00m, over one year. But on the other hand it also has US$116.2m in cash, leading to a US$101.4m net cash position.

How Strong Is Molecular Templates' Balance Sheet?

According to the last reported balance sheet, Molecular Templates had liabilities of US$40.4m due within 12 months, and liabilities of US$44.5m due beyond 12 months. On the other hand, it had cash of US$116.2m and US$3.79m worth of receivables due within a year. So it actually has US$35.1m 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. Succinctly put, Molecular Templates 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 Molecular Templates'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 Molecular Templates wasn't profitable at an EBIT level, but managed to grow its revenue by 3.7%, to US$22m. 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?

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 Molecular Templates lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$56m of cash and made a loss of US$92m. But at least it has US$101.4m 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. 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. Case in point: We've spotted 3 warning signs for Molecular Templates you should be aware of.

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.

If you’re looking to trade Molecular Templates, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.