Is Cytokinetics (NASDAQ:CYTK) Using Debt Sensibly?

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 can see that Cytokinetics, Incorporated (NASDAQ:CYTK) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Cytokinetics

What Is Cytokinetics's Net Debt?

As you can see below, at the end of December 2021, Cytokinetics had US$142.8m of debt, up from US$135.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$471.6m in cash, so it actually has US$328.8m net cash.

A Look At Cytokinetics' Liabilities

According to the last reported balance sheet, Cytokinetics had liabilities of US$71.9m due within 12 months, and liabilities of US$525.6m due beyond 12 months. On the other hand, it had cash of US$471.6m and US$51.8m worth of receivables due within a year. So its liabilities total US$74.0m more than the combination of its cash and short-term receivables.

Of course, Cytokinetics has a market capitalization of US$3.07b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Cytokinetics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cytokinetics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Cytokinetics reported revenue of US$70m, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Cytokinetics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cytokinetics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$191m of cash and made a loss of US$215m. However, it has net cash of US$328.8m, so it has a bit of time before it will need more capital. Cytokinetics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 2 warning signs for Cytokinetics that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.