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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Syndax Pharmaceuticals's Debt?
As you can see below, at the end of September 2023, Syndax Pharmaceuticals had US$1.87m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$373.8m in cash, leading to a US$372.0m net cash position.
A Look At Syndax Pharmaceuticals' Liabilities
According to the last reported balance sheet, Syndax Pharmaceuticals had liabilities of US$39.2m due within 12 months, and liabilities of US$864.0k due beyond 12 months. Offsetting these obligations, it had cash of US$373.8m as well as receivables valued at US$4.20m due within 12 months. So it can boast US$338.0m more liquid assets than total liabilities.
This excess liquidity suggests that Syndax Pharmaceuticals is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Syndax Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Syndax Pharmaceuticals 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.
Since Syndax Pharmaceuticals doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Syndax Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Syndax Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$142m of cash and made a loss of US$209m. But the saving grace is the US$372.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Syndax Pharmaceuticals is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...
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.