Warren Buffett famously said, '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 can see that ProQR Therapeutics N.V. (NASDAQ:PRQR) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
View our latest analysis for ProQR Therapeutics
What Is ProQR Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that ProQR Therapeutics had €5.24m of debt in September 2023, down from €6.66m, one year before. However, it does have €120.6m in cash offsetting this, leading to net cash of €115.3m.
A Look At ProQR Therapeutics' Liabilities
We can see from the most recent balance sheet that ProQR Therapeutics had liabilities of €26.6m falling due within a year, and liabilities of €69.0m due beyond that. On the other hand, it had cash of €120.6m and €3.17m worth of receivables due within a year. So it actually has €28.0m 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. Simply put, the fact that ProQR Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. 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. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year ProQR Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to €5.0m. With any luck the company will be able to grow its way to profitability.
So How Risky Is ProQR Therapeutics?
While ProQR Therapeutics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €8.3m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 38% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - ProQR Therapeutics has 3 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.