Does Aldeyra Therapeutics Inc’s (ALDX) Debt Level Pose A Serious Problem?
Aldeyra Therapeutics Inc (NASDAQ:ALDX) is a small-cap stock with a market capitalization of USD $113.75M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for ALDX
How does ALDX’s operating cash flow stack up against its debt?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can ALDX pay off what it owes to its debtholder by using only cash from its operational activities? In the case of ALDX, operating cash flow turned out to be -12.75x its debt level over the past twelve months. This means what ALDX can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at ALDX’s operations at this point in time.
Can ALDX meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, ALDX may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that ALDX is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Does ALDX face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of ALDX, the debt-to-equity ratio is 5.68%, which indicates that the company faces low risk associated with debt. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. ALDX’s interest on debt is sufficiently covered by earnings as it sits at around 675.22x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? Although ALDX’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that ALDX’s financial situation may change. I suggest keeping on top of market expectations for ALDX’s future growth on our free analysis platform.
Are you a potential investor? ALDX’s low-debt position gives it headroom for future growth funding in the future. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to further analyse ALDX’s track record. I encourage you to continue your research by taking a look at ALDX’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
