Health Check: How Prudently Does Aldeyra Therapeutics (NASDAQ:ALDX) Use Debt?

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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aldeyra Therapeutics

What Is Aldeyra Therapeutics's Debt?

As you can see below, Aldeyra Therapeutics had US$16.1m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$143.3m in cash offsetting this, leading to net cash of US$127.2m.

How Strong Is Aldeyra Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aldeyra Therapeutics had liabilities of US$21.6m due within 12 months and liabilities of US$2.66m due beyond that. Offsetting these obligations, it had cash of US$143.3m as well as receivables valued at US$23.7k due within 12 months. So it actually has US$119.1m more liquid assets than total liabilities.

This luscious liquidity implies that Aldeyra Therapeutics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Aldeyra Therapeutics 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 Aldeyra Therapeutics'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, Aldeyra Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Aldeyra Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aldeyra Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$42m of cash and made a loss of US$46m. With only US$127.2m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Aldeyra Therapeutics you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.