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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Mersana Therapeutics, Inc. (NASDAQ:MRSN) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
What Is Mersana Therapeutics's Debt?
As you can see below, Mersana Therapeutics had US$4.94m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$270.9m in cash, so it actually has US$266.0m net cash.
How Healthy Is Mersana Therapeutics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mersana Therapeutics had liabilities of US$21.1m due within 12 months and liabilities of US$15.8m due beyond that. Offsetting these obligations, it had cash of US$270.9m as well as receivables valued at US$298.0k due within 12 months. So it actually has US$234.4m more liquid assets than total liabilities.
This surplus suggests that Mersana Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Mersana 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 Mersana 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, Mersana Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$859k, which is a fall of 98%. To be frank that doesn't bode well.
So How Risky Is Mersana 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 Mersana Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$70m and booked a US$75m accounting loss. But at least it has US$266.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Mersana Therapeutics (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.
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.
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.
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