Health Check: How Prudently Does GenSight Biologics (EPA:SIGHT) Use Debt?

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.' 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. Importantly, GenSight Biologics S.A. (EPA:SIGHT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for GenSight Biologics

How Much Debt Does GenSight Biologics Carry?

You can click the graphic below for the historical numbers, but it shows that GenSight Biologics had €13.7m of debt in June 2022, down from €16.5m, one year before. But it also has €24.1m in cash to offset that, meaning it has €10.4m net cash.

How Healthy Is GenSight Biologics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GenSight Biologics had liabilities of €19.7m due within 12 months and liabilities of €17.6m due beyond that. Offsetting this, it had €24.1m in cash and €5.19m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.99m.

Given GenSight Biologics has a market capitalization of €182.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, GenSight Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GenSight Biologics'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.

Over 12 months, GenSight Biologics made a loss at the EBIT level, and saw its revenue drop to €5.1m, which is a fall of 54%. To be frank that doesn't bode well.

So How Risky Is GenSight Biologics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that GenSight Biologics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €24m of cash and made a loss of €31m. Given it only has net cash of €10.4m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for GenSight Biologics (of which 3 don't sit too well with us!) you should know about.

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.