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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
What Is Geron’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Geron had US$34.7m of debt, an increase on US$23.9m, over one year. However, it does have US$176.1m in cash offsetting this, leading to net cash of US$141.5m.
How Strong Is Geron’s Balance Sheet?
According to the last reported balance sheet, Geron had liabilities of US$38.5m due within 12 months, and liabilities of US$39.1m due beyond 12 months. On the other hand, it had cash of US$176.1m and US$610.0k worth of receivables due within a year. So it can boast US$99.2m more liquid assets than total liabilities.
This surplus suggests that Geron is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Succinctly put, Geron boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Geron can strengthen its balance sheet over time.
Since Geron doesn’t have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Geron?
We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$86m of cash and made a loss of US$108m. But at least it has US$141.5m 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.