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.' 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. We can see that Molecular Templates, Inc. (NASDAQ:MTEM) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Molecular Templates Carry?
The chart below, which you can click on for greater detail, shows that Molecular Templates had US$3.08m in debt in June 2019; about the same as the year before. However, it does have US$72.3m in cash offsetting this, leading to net cash of US$69.2m.
How Healthy Is Molecular Templates's Balance Sheet?
According to the last reported balance sheet, Molecular Templates had liabilities of US$25.7m due within 12 months, and liabilities of US$16.2m due beyond 12 months. On the other hand, it had cash of US$72.3m and US$5.16m worth of receivables due within a year. So it actually has US$35.6m more liquid assets than total liabilities.
This surplus suggests that Molecular Templates 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. Succinctly put, Molecular Templates 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 Molecular Templates's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Molecular Templates managed to grow its revenue by 620%, to US$24m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Molecular Templates?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Molecular Templates lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$16m and booked a US$27m accounting loss. But the saving grace is the US$72m on the balance sheet. That means it could keep spending at its current rate for more than four years. Importantly, Molecular Templates's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like Molecular Templates 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.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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