Is Cytokinetics (NASDAQ:CYTK) Weighed On By Its Debt Load?

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.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cytokinetics

What Is Cytokinetics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Cytokinetics had debt of US$141.0m, up from US$134.0m in one year. But it also has US$477.6m in cash to offset that, meaning it has US$336.7m net cash.

How Healthy Is Cytokinetics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cytokinetics had liabilities of US$80.9m due within 12 months and liabilities of US$497.7m due beyond that. On the other hand, it had cash of US$477.6m and US$644.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$100.2m.

Since publicly traded Cytokinetics shares are worth a total of US$3.03b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 it is future earnings, more than anything, that will determine Cytokinetics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Cytokinetics had a loss before interest and tax, and actually shrunk its revenue by 60%, to US$22m. That makes us nervous, to say the least.

So How Risky Is Cytokinetics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Cytokinetics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$83m of cash and made a loss of US$229m. However, it has net cash of US$336.7m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Cytokinetics .

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.