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CymaBay Therapeutics (NASDAQ:CBAY) Has Debt But No Earnings; Should You Worry?

·4 min read

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, CymaBay Therapeutics, Inc. (NASDAQ:CBAY) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CymaBay Therapeutics

What Is CymaBay Therapeutics's Net Debt?

As you can see below, at the end of June 2022, CymaBay Therapeutics had US$82.3m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$163.9m in cash, leading to a US$81.6m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is CymaBay Therapeutics' Balance Sheet?

According to the last reported balance sheet, CymaBay Therapeutics had liabilities of US$12.6m due within 12 months, and liabilities of US$82.7m due beyond 12 months. Offsetting this, it had US$163.9m in cash and US$69.0k in receivables that were due within 12 months. So it actually has US$68.7m more liquid assets than total liabilities.

This surplus suggests that CymaBay Therapeutics is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

It seems likely shareholders hope that CymaBay Therapeutics can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is CymaBay 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 CymaBay 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$78m and booked a US$104m accounting loss. However, it has net cash of US$81.6m, 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. For example, we've discovered 4 warning signs for CymaBay Therapeutics (1 can't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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