Rock star Growth Puts Geron (NASDAQ:GERN) In A Position To 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Geron Corporation (NASDAQ:GERN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Geron

How Much Debt Does Geron Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Geron had debt of US$50.2m, up from US$24.2m in one year. However, its balance sheet shows it holds US$166.7m in cash, so it actually has US$116.5m net cash.

How Healthy Is Geron's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Geron had liabilities of US$46.6m due within 12 months and liabilities of US$54.3m due beyond that. Offsetting these obligations, it had cash of US$166.7m as well as receivables valued at US$5.24m due within 12 months. So it can boast US$71.0m more liquid assets than total liabilities.

This surplus suggests that Geron has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Geron 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 Geron 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.

In the last year Geron wasn't profitable at an EBIT level, but managed to grow its revenue by 308%, to US$1.4m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Geron?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Geron lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$97m of cash and made a loss of US$118m. However, it has net cash of US$116.5m, so it has a bit of time before it will need more capital. The good news for shareholders is that Geron has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Geron , 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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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.