Aldeyra Therapeutics (NASDAQ:ALDX) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Aldeyra Therapeutics, Inc. (NASDAQ:ALDX) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Aldeyra Therapeutics

How Much Debt Does Aldeyra Therapeutics Carry?

As you can see below, Aldeyra Therapeutics had US$15.8m of debt, at December 2022, 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$174.3m in cash, leading to a US$158.5m net cash position.

How Strong Is Aldeyra Therapeutics' Balance Sheet?

According to the last reported balance sheet, Aldeyra Therapeutics had liabilities of US$15.4m due within 12 months, and liabilities of US$14.9m due beyond 12 months. Offsetting this, it had US$174.3m in cash and US$3.24m in receivables that were due within 12 months. So it can boast US$147.3m more liquid assets than total liabilities.

This excess liquidity suggests that Aldeyra Therapeutics is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Aldeyra Therapeutics 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 Aldeyra Therapeutics 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, Aldeyra Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Aldeyra Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aldeyra Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$57m and booked a US$62m accounting loss. Given it only has net cash of US$158.5m, the company may need to raise more capital if it doesn't reach break-even soon. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Aldeyra Therapeutics (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

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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.