Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Cidara Therapeutics, Inc. (NASDAQ:CDTX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Cidara Therapeutics Carry?
The image below, which you can click on for greater detail, shows that Cidara Therapeutics had debt of US$9.23m at the end of June 2020, a reduction from US$9.95m over a year. However, it does have US$54.8m in cash offsetting this, leading to net cash of US$45.6m.
A Look At Cidara Therapeutics's Liabilities
Zooming in on the latest balance sheet data, we can see that Cidara Therapeutics had liabilities of US$31.6m due within 12 months and liabilities of US$484.0k due beyond that. Offsetting this, it had US$54.8m in cash and US$5.95m in receivables that were due within 12 months. So it actually has US$28.7m more liquid assets than total liabilities.
This excess liquidity suggests that Cidara Therapeutics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Cidara Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cidara 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.
While it hasn't made a profit, at least Cidara Therapeutics booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Cidara Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Cidara Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$28m of cash and made a loss of US$47m. However, it has net cash of US$45.6m, so it has a bit of time before it will need more capital. 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. For example, we've discovered 3 warning signs for Cidara Therapeutics that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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.
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