Is CymaBay Therapeutics (NASDAQ:CBAY) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, CymaBay Therapeutics, Inc. (NASDAQ:CBAY) does carry 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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for CymaBay Therapeutics

What Is CymaBay Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 CymaBay Therapeutics had US$23.3m of debt, an increase on none, over one year. But it also has US$113.8m in cash to offset that, meaning it has US$90.5m net cash.

How Strong Is CymaBay Therapeutics' Balance Sheet?

The latest balance sheet data shows that CymaBay Therapeutics had liabilities of US$11.7m due within a year, and liabilities of US$24.1m falling due after that. Offsetting this, it had US$113.8m in cash and US$69.0k in receivables that were due within 12 months. So it actually has US$78.0m more liquid assets than total liabilities.

This surplus strongly suggests that CymaBay Therapeutics has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, CymaBay 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 ultimately the future profitability of the business will decide if CymaBay Therapeutics 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping CymaBay Therapeutics can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is CymaBay 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 CymaBay Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$70m of cash and made a loss of US$79m. However, it has net cash of US$90.5m, 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with CymaBay Therapeutics (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.