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 Mersana Therapeutics, Inc. (NASDAQ:MRSN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Mersana Therapeutics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Mersana Therapeutics had US$4.84m of debt, an increase on none, over one year. But it also has US$112.0m in cash to offset that, meaning it has US$107.2m net cash.
A Look At Mersana Therapeutics's Liabilities
Zooming in on the latest balance sheet data, we can see that Mersana Therapeutics had liabilities of US$22.4m due within 12 months and liabilities of US$6.23m due beyond that. Offsetting these obligations, it had cash of US$112.0m as well as receivables valued at US$298.0k due within 12 months. So it can boast US$83.7m more liquid assets than total liabilities.
This luscious liquidity implies that Mersana Therapeutics's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Mersana Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 reported revenue of US$43m, which is a gain of 242%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
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. Indeed, in that time it burnt through US$72m of cash and made a loss of US$34m. But at least it has US$107.2m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Mersana Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like Mersana 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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