Is ProQR Therapeutics (NASDAQ:PRQR) Using Too Much Debt?

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.' 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. Importantly, ProQR Therapeutics N.V. (NASDAQ:PRQR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at 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 €4.29m of debt in December 2023, down from €6.77m, one year before. However, it does have €118.9m in cash offsetting this, leading to net cash of €114.6m.

A Look At ProQR Therapeutics' Liabilities

According to the last reported balance sheet, ProQR Therapeutics had liabilities of €34.2m due within 12 months, and liabilities of €62.3m due beyond 12 months. On the other hand, it had cash of €118.9m and €1.27m worth of receivables due within a year. So it actually has €23.7m more liquid assets than total liabilities.

This surplus suggests that ProQR Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ProQR Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ProQR Therapeutics can strengthen its balance sheet over time. 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 ProQR Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to €6.6m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 €28m. 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 51% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. Case in point: We've spotted 3 warning signs for ProQR Therapeutics you should be aware of, and 1 of them can't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.