Is Aldeyra Therapeutics (NASDAQ:ALDX) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Aldeyra Therapeutics, Inc. (NASDAQ:ALDX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Aldeyra Therapeutics

What Is Aldeyra Therapeutics's Debt?

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

How Healthy Is Aldeyra Therapeutics' Balance Sheet?

According to the last reported balance sheet, Aldeyra Therapeutics had liabilities of US$21.6m due within 12 months, and liabilities of US$2.66m due beyond 12 months. Offsetting this, it had US$143.3m in cash and US$23.7k in receivables that were due within 12 months. So it actually has US$119.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Aldeyra Therapeutics' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Aldeyra Therapeutics 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 Aldeyra Therapeutics's ability to maintain a healthy balance sheet going forward. 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 in the last year Aldeyra Therapeutics 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$42m and booked a US$46m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$127.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Aldeyra Therapeutics you should be aware of, and 1 of them shouldn't be ignored.

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.