Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Molecular Templates, Inc. (NASDAQ:MTEM) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Molecular Templates's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Molecular Templates had debt of US$14.7m, up from US$3.08m in one year. But it also has US$91.0m in cash to offset that, meaning it has US$76.3m net cash.
How Healthy Is Molecular Templates's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Molecular Templates had liabilities of US$41.4m due within 12 months and liabilities of US$45.2m due beyond that. On the other hand, it had cash of US$91.0m and US$9.07m worth of receivables due within a year. So it can boast US$13.5m more liquid assets than total liabilities.
This surplus suggests that Molecular Templates has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Molecular Templates 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 ultimately the future profitability of the business will decide if Molecular Templates can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Molecular Templates made a loss at the EBIT level, and saw its revenue drop to US$21m, which is a fall of 13%. We would much prefer see growth.
So How Risky Is Molecular Templates?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Molecular Templates had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$57m and booked a US$107m accounting loss. However, it has net cash of US$76.3m, so it has a bit of time before it will need more capital. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Molecular Templates that you should be aware of before investing here.
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.