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Is Molecular Templates (NASDAQ:MTEM) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Molecular Templates, Inc. (NASDAQ:MTEM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Molecular Templates

What Is Molecular Templates's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Molecular Templates had debt of US$35.0m, up from US$14.7m in one year. However, its balance sheet shows it holds US$197.6m in cash, so it actually has US$162.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Molecular Templates' Balance Sheet?

We can see from the most recent balance sheet that Molecular Templates had liabilities of US$44.7m falling due within a year, and liabilities of US$102.7m due beyond that. Offsetting this, it had US$197.6m in cash and US$234.0k in receivables that were due within 12 months. So it can boast US$50.5m 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. Simply put, the fact that Molecular Templates has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Molecular Templates can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Molecular Templates wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$26m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Molecular Templates?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Molecular Templates had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$30m and booked a US$94m accounting loss. But at least it has US$162.6m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Molecular Templates may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Molecular Templates (including 1 which is concerning) .

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. 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.

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