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. As with many other companies MeiraGTx Holdings plc (NASDAQ:MGTX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is MeiraGTx Holdings's Net Debt?

As you can see below, MeiraGTx Holdings had US$72.4m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$119.2m in cash, so it actually has US$46.8m net cash.

A Look At MeiraGTx Holdings' Liabilities

We can see from the most recent balance sheet that MeiraGTx Holdings had liabilities of US$47.5m falling due within a year, and liabilities of US$140.0m due beyond that. Offsetting this, it had US$119.2m in cash and US$24.1m in receivables that were due within 12 months. So its liabilities total US$44.2m more than the combination of its cash and short-term receivables.

Given MeiraGTx Holdings has a market capitalization of US$296.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, MeiraGTx Holdings 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 ultimately the future profitability of the business will decide if MeiraGTx Holdings 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.

Over 12 months, MeiraGTx Holdings made a loss at the EBIT level, and saw its revenue drop to US$11m, which is a fall of 16%. We would much prefer see growth.

So How Risky Is MeiraGTx Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months MeiraGTx Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$118m of cash and made a loss of US$74m. However, it has net cash of US$46.8m, 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. 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. We've identified 2 warning signs with MeiraGTx Holdings (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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