Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Geron Corporation (NASDAQ:GERN) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Geron Carry?
As you can see below, at the end of June 2024, Geron had US$83.4m of debt, up from US$51.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$362.7m in cash, so it actually has US$279.3m net cash.
A Look At Geron's Liabilities
Zooming in on the latest balance sheet data, we can see that Geron had liabilities of US$103.5m due within 12 months and liabilities of US$39.2m due beyond that. Offsetting this, it had US$362.7m in cash and US$3.13m in receivables that were due within 12 months. So it actually has US$223.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Geron could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Geron has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Geron can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Geron reported revenue of US$1.4m, which is a gain of 205%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Geron?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Geron had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$209m of cash and made a loss of US$220m. However, it has net cash of US$279.3m, so it has a bit of time before it will need more capital. Importantly, Geron's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Geron has 2 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.
