Is Geron (NASDAQ:GERN) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Geron Corporation (NASDAQ:GERN) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Geron

What Is Geron's Debt?

As you can see below, Geron had US$51.6m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$371.4m in cash, leading to a US$319.7m net cash position.

How Healthy Is Geron's Balance Sheet?

We can see from the most recent balance sheet that Geron had liabilities of US$72.6m falling due within a year, and liabilities of US$44.3m due beyond that. On the other hand, it had cash of US$371.4m and US$1.19m worth of receivables due within a year. So it can boast US$255.7m more liquid assets than total liabilities.

It's good to see that Geron has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Geron can strengthen its balance sheet over time. 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?

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. And over the same period it saw negative free cash outflow of US$142m and booked a US$171m accounting loss. However, it has net cash of US$319.7m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 2 warning signs for Geron (1 is potentially serious) you should be aware of.

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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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.