- Oops!Something went wrong.Please try again later.
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.' 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 Geron Corporation (NASDAQ:GERN) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Geron's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Geron had US$23.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$227.6m in cash, so it actually has US$203.7m net cash.
How Healthy Is Geron's Balance Sheet?
The latest balance sheet data shows that Geron had liabilities of US$24.2m due within a year, and liabilities of US$28.8m falling due after that. Offsetting this, it had US$227.6m in cash and US$989.0k in receivables that were due within 12 months. So it can boast US$175.7m more liquid assets than total liabilities.
This excess liquidity suggests that Geron is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Geron has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Geron's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Given its lack of meaningful operating revenue, Geron shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is Geron?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Geron lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$65m of cash and made a loss of US$81m. But at least it has US$203.7m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Geron (2 make us uncomfortable!) that you should be aware of before investing here.
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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.