Auditors Have Doubts About Zosano Pharma (NASDAQ:ZSAN)

When Zosano Pharma Corporation (NASDAQ:ZSAN) reported its results to December 2020 its auditors, Deloitte & Touche LLP could not be sure that it would be able to continue as a going concern in the next year. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.

Given its situation, it may not be in a good position to raise capital on favorable terms. So current risks on the balance sheet could have a big impact on how shareholders fare from here. Debt is always a risk factor in these cases, as creditors could be in a position to wind up the company, in the worst case scenario.

Check out our latest analysis for Zosano Pharma

What Is Zosano Pharma's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Zosano Pharma had debt of US$1.62m, up from none in one year. However, its balance sheet shows it holds US$35.3m in cash, so it actually has US$33.6m net cash.

How Strong Is Zosano Pharma's Balance Sheet?

We can see from the most recent balance sheet that Zosano Pharma had liabilities of US$14.5m falling due within a year, and liabilities of US$9.99m due beyond that. Offsetting these obligations, it had cash of US$35.3m as well as receivables valued at US$124.0k due within 12 months. So it can boast US$10.9m more liquid assets than total liabilities.

This surplus suggests that Zosano Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zosano Pharma 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 Zosano Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, Zosano Pharma shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

So How Risky Is Zosano Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Zosano Pharma had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$40m and booked a US$33m accounting loss. With only US$33.6m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Zosano Pharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. We're too cautious to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Zosano Pharma (of which 4 can't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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