David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies ProQR Therapeutics N.V. (NASDAQ:PRQR) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is ProQR Therapeutics’s Debt?
The image below, which you can click on for greater detail, shows that at March 2021 ProQR Therapeutics had debt of €17.8m, up from €13.7m in one year. But it also has €67.9m in cash to offset that, meaning it has €50.0m net cash.
How Strong Is ProQR Therapeutics’ Balance Sheet?
We can see from the most recent balance sheet that ProQR Therapeutics had liabilities of €10.5m falling due within a year, and liabilities of €31.9m due beyond that. Offsetting this, it had €67.9m in cash and €454.0k in receivables that were due within 12 months. So it can boast €25.9m more liquid assets than total liabilities.
This short term liquidity is a sign that ProQR Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ProQR Therapeutics 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 ultimately the future profitability of the business will decide if ProQR Therapeutics can strengthen its balance sheet over time.
Given its lack of meaningful operating revenue, ProQR Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is ProQR Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that ProQR Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €45m and booked a €43m accounting loss. However, it has net cash of €50.0m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start.