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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Mersana Therapeutics, Inc. (NASDAQ:MRSN) 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 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Mersana Therapeutics Carry?

The chart below, which you can click on for greater detail, shows that Mersana Therapeutics had US$25.5m in debt in September 2024; about the same as the year before. But it also has US$155.2m in cash to offset that, meaning it has US$129.7m net cash.

How Strong Is Mersana Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Mersana Therapeutics had liabilities of US$68.3m falling due within a year, and liabilities of US$100.2m due beyond that. Offsetting these obligations, it had cash of US$155.2m as well as receivables valued at US$1.00m due within 12 months. So its liabilities total US$12.3m more than the combination of its cash and short-term receivables.

Of course, Mersana Therapeutics has a market capitalization of US$265.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mersana Therapeutics also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Mersana Therapeutics'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 Mersana Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$35m. That's not what we would hope to see.

So How Risky Is Mersana Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Mersana Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$96m of cash and made a loss of US$75m. However, it has net cash of US$129.7m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 3 warning signs with Mersana Therapeutics , and understanding them should be part of your investment process.

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.

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