Does Mesoblast (ASX:MSB) have a healthy balance sheet?
Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Mesoblast Limited (ASX:MSB) has debt on its balance sheet. But the more important question is: what risk does this debt create?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest review for Mesoblast
What is Mesoblast’s debt?
As you can see below, Mesoblast had $94.2 million in debt as of March 2022, roughly the same as the previous year. You can click on the graph for more details. However, he has $76.8 million in cash to offset this, resulting in a net debt of approximately $17.4 million.
How strong is Mesoblast’s balance sheet?
The latest balance sheet data shows that Mesoblast had liabilities of $52.2 million due within the year, and liabilities of $112.4 million due thereafter. On the other hand, it had a cash position of 76.8 million dollars and 5.16 million dollars of receivables at less than one year. It therefore has liabilities totaling $82.6 million more than its cash and short-term receivables, combined.
This shortfall is not that bad as Mesoblast is worth US$398.6 million and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it must be carefully examined whether he can manage his debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Mesoblast can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Mesoblast was not profitable in terms of EBIT, but managed to increase its turnover by 62%, to $10.0 million. With a little luck, the company will be able to progress towards profitability.
While we can certainly appreciate Mesoblast’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Its EBIT loss was US$80 million. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he’s burned through $77 million in cash in the past year. So suffice it to say that we consider the stock to be very risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 2 warning signs we spotted with Mesoblast.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.