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, ProQR Therapeutics N.V. (NASDAQ:PRQR) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is ProQR Therapeutics’s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 ProQR Therapeutics had debt of €10.5m, up from €8.02m in one year. But on the other hand it also has €82.5m in cash, leading to a €71.9m net cash position.
A Look At ProQR Therapeutics’s Liabilities
According to the last reported balance sheet, ProQR Therapeutics had liabilities of €9.05m due within 12 months, and liabilities of €11.0m due beyond 12 months. Offsetting these obligations, it had cash of €82.5m as well as receivables valued at €1.43m due within 12 months. So it can boast €63.9m more liquid assets than total liabilities.
This surplus suggests that ProQR Therapeutics is using debt in a way that is appears to be both safe and conservative. 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. 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 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.
Since ProQR Therapeutics doesn’t have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is ProQR 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 ProQR Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €37m of cash and made a loss of €45m. However, it has net cash of €82m, so it has a bit of time before it will need more capital. 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. For riskier companies like ProQR Therapeutics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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