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Rock star Growth Puts Molecular Templates (NASDAQ:MTEM) In A Position To Use Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Molecular Templates, Inc. (NASDAQ:MTEM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View 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 December 2021 Molecular Templates had debt of US$35.5m, up from US$14.9m in one year. But it also has US$143.0m in cash to offset that, meaning it has US$107.6m net cash.

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

How Strong Is Molecular Templates' Balance Sheet?

We can see from the most recent balance sheet that Molecular Templates had liabilities of US$46.7m falling due within a year, and liabilities of US$80.0m due beyond that. Offsetting this, it had US$143.0m in cash and US$234.0k in receivables that were due within 12 months. So it can boast US$16.6m more liquid assets than total liabilities.

This excess liquidity suggests that Molecular Templates is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 105%, to US$39m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Molecular Templates?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$34m and booked a US$83m accounting loss. However, it has net cash of US$107.6m, so it has a bit of time before it will need more capital. Importantly, Molecular Templates's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Be aware that Molecular Templates is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.