Is IDEAYA Biosciences (NASDAQ:IDYA) A Risky Investment?

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.' 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, IDEAYA Biosciences, Inc. (NASDAQ:IDYA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for IDEAYA Biosciences

What Is IDEAYA Biosciences's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 IDEAYA Biosciences had US$2.10m of debt, an increase on none, over one year. But on the other hand it also has US$468.8m in cash, leading to a US$466.7m net cash position.

How Healthy Is IDEAYA Biosciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IDEAYA Biosciences had liabilities of US$24.9m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of US$468.8m and US$6.70m worth of receivables due within a year. So it can boast US$450.6m more liquid assets than total liabilities.

This short term liquidity is a sign that IDEAYA Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, IDEAYA Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if IDEAYA Biosciences 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.

In the last year IDEAYA Biosciences had a loss before interest and tax, and actually shrunk its revenue by 54%, to US$23m. To be frank that doesn't bode well.

So How Risky Is IDEAYA Biosciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months IDEAYA Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$116m of cash and made a loss of US$113m. While this does make the company a bit risky, it's important to remember it has net cash of US$466.7m. That means it could keep spending at its current rate for more than two years. 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 2 warning signs for IDEAYA Biosciences you should be aware of, and 1 of them can'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.

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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.