Is TScan Therapeutics (NASDAQ:TCRX) 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.' 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 note that TScan Therapeutics, Inc. (NASDAQ:TCRX) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TScan Therapeutics

How Much Debt Does TScan Therapeutics Carry?

The chart below, which you can click on for greater detail, shows that TScan Therapeutics had US$29.9m in debt in September 2023; about the same as the year before. But on the other hand it also has US$215.4m in cash, leading to a US$185.5m net cash position.

How Strong Is TScan Therapeutics' Balance Sheet?

The latest balance sheet data shows that TScan Therapeutics had liabilities of US$33.2m due within a year, and liabilities of US$89.3m falling due after that. On the other hand, it had cash of US$215.4m and US$31.9m worth of receivables due within a year. So it can boast US$124.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that TScan Therapeutics' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that TScan 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 TScan 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, TScan Therapeutics reported revenue of US$17m, which is a gain of 27%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is TScan Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that TScan Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$58m of cash and made a loss of US$88m. But the saving grace is the US$185.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, TScan Therapeutics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 4 warning signs with TScan Therapeutics (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.