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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Seres Therapeutics, Inc. (NASDAQ:MCRB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Seres Therapeutics’s Net Debt?

The chart below, which you can click on for greater detail, shows that Seres Therapeutics had US$25.3m in debt in June 2021; about the same as the year before. However, its balance sheet shows it holds US$214.6m in cash, so it actually has US$189.2m net cash.

A Look At Seres Therapeutics’ Liabilities

Zooming in on the latest balance sheet data, we can see that Seres Therapeutics had liabilities of US$56.2m due within 12 months and liabilities of US$112.4m due beyond that. Offsetting this, it had US$214.6m in cash and US$1.25m in receivables that were due within 12 months. So it actually has US$47.2m more liquid assets than total liabilities.

This surplus suggests that Seres Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Seres Therapeutics boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Seres Therapeutics can strengthen its balance sheet over time.

Over 12 months, Seres Therapeutics reported revenue of US$30m, which is a gain of 3.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Seres Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Seres Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$117m and booked a US$132m accounting loss. But at least it has US$189.2m on the balance sheet to spend on growth, near-term. 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.