Is Gossamer Bio (NASDAQ:GOSS) A Risky Investment?

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 Gossamer Bio, Inc. (NASDAQ:GOSS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gossamer Bio

What Is Gossamer Bio's Net Debt?

The chart below, which you can click on for greater detail, shows that Gossamer Bio had US$175.7m in debt in June 2021; about the same as the year before. But it also has US$405.9m in cash to offset that, meaning it has US$230.2m net cash.

How Healthy Is Gossamer Bio's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gossamer Bio had liabilities of US$30.0m due within 12 months and liabilities of US$181.8m due beyond that. Offsetting this, it had US$405.9m in cash and US$100.0k in receivables that were due within 12 months. So it can boast US$194.2m more liquid assets than total liabilities.

It's good to see that Gossamer Bio has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Gossamer Bio 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 it is future earnings, more than anything, that will determine Gossamer Bio'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.

Since Gossamer Bio doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Gossamer Bio?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Gossamer Bio 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$195m and booked a US$240m accounting loss. However, it has net cash of US$230.2m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Gossamer Bio you should be aware of, and 2 of them shouldn't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you decide to trade Gossamer Bio, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.