Health Check: How Prudently Does ProQR Therapeutics (NASDAQ:PRQR) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that ProQR Therapeutics N.V. (NASDAQ:PRQR) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ProQR Therapeutics

What Is ProQR Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ProQR Therapeutics had €5.24m of debt in September 2023, down from €6.66m, one year before. But on the other hand it also has €120.6m in cash, leading to a €115.3m net cash position.

How Strong Is ProQR Therapeutics' Balance Sheet?

According to the last reported balance sheet, ProQR Therapeutics had liabilities of €26.6m due within 12 months, and liabilities of €69.0m due beyond 12 months. On the other hand, it had cash of €120.6m and €3.17m worth of receivables due within a year. So it can boast €28.0m more liquid assets than total liabilities.

This excess liquidity suggests that ProQR Therapeutics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that ProQR Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ProQR 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.

Over 12 months, ProQR Therapeutics reported revenue of €5.0m, which is a gain of 38%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ProQR Therapeutics?

While ProQR Therapeutics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €8.3m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 38% is a good sign. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for ProQR Therapeutics (of which 1 is significant!) 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. 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.