Yahoo Finance Is Mesoblast (ASX:MSB) Using Debt Sensibly?
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 Mesoblast Limited (ASX:MSB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Mesoblast
How Much Debt Does Mesoblast Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Mesoblast had US$92.5m of debt, an increase on US$87.0m, over one year. However, it does have US$158.3m in cash offsetting this, leading to net cash of US$65.7m.
A Look At Mesoblast's Liabilities
We can see from the most recent balance sheet that Mesoblast had liabilities of US$98.5m falling due within a year, and liabilities of US$66.6m due beyond that. Offsetting this, it had US$158.3m in cash and US$2.22m in receivables that were due within 12 months. So it has liabilities totalling US$4.71m more than its cash and near-term receivables, combined.
This state of affairs indicates that Mesoblast's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.07b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Mesoblast boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mesoblast'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.
Over 12 months, Mesoblast made a loss at the EBIT level, and saw its revenue drop to US$6.2m, which is a fall of 82%. To be frank that doesn't bode well.
So How Risky Is Mesoblast?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Mesoblast had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$108m of cash and made a loss of US$109m. However, it has net cash of US$65.7m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Mesoblast , and understanding them should be part of your investment process.
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.
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 editorial-team (at) simplywallst.com.
