Cytokinetics (NASDAQ:CYTK) Has Debt But No Earnings; Should You Worry?

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. We can see that Cytokinetics, Incorporated (NASDAQ:CYTK) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Cytokinetics

How Much Debt Does Cytokinetics Carry?

As you can see below, at the end of June 2022, Cytokinetics had US$197.0m of debt, up from US$139.1m a year ago. Click the image for more detail. But on the other hand it also has US$586.0m in cash, leading to a US$389.0m net cash position.

A Look At Cytokinetics' Liabilities

The latest balance sheet data shows that Cytokinetics had liabilities of US$66.8m due within a year, and liabilities of US$593.5m falling due after that. Offsetting this, it had US$586.0m in cash and US$1.97m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$72.3m.

This state of affairs indicates that Cytokinetics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$4.77b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Cytokinetics also has more cash than debt, so we're pretty confident 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 Cytokinetics 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.

Over 12 months, Cytokinetics reported revenue of US$151m, which is a gain of 162%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Cytokinetics?

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 Cytokinetics 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$236m and booked a US$216m accounting loss. However, it has net cash of US$389.0m, so it has a bit of time before it will need more capital. The good news for shareholders is that Cytokinetics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cytokinetics is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.