Rock star Growth Puts GenSight Biologics (EPA:SIGHT) In A Position To Use Debt

Warren Buffett famously said, '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. As with many other companies GenSight Biologics S.A. (EPA:SIGHT) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GenSight Biologics

What Is GenSight Biologics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 GenSight Biologics had €16.5m of debt, an increase on €13.0m, over one year. But it also has €54.3m in cash to offset that, meaning it has €37.8m net cash.

How Strong Is GenSight Biologics' Balance Sheet?

We can see from the most recent balance sheet that GenSight Biologics had liabilities of €17.4m falling due within a year, and liabilities of €17.1m due beyond that. Offsetting this, it had €54.3m in cash and €7.25m in receivables that were due within 12 months. So it actually has €27.0m more liquid assets than total liabilities.

This short term liquidity is a sign that GenSight Biologics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GenSight Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GenSight Biologics 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, GenSight Biologics reported revenue of €11m, which is a gain of 93%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is GenSight Biologics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year GenSight Biologics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €19m and booked a €28m accounting loss. Given it only has net cash of €37.8m, the company may need to raise more capital if it doesn't reach break-even soon. GenSight Biologics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 2 warning signs with GenSight Biologics , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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