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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Cytokinetics, Incorporated (NASDAQ:CYTK) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cytokinetics

What Is Cytokinetics's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Cytokinetics had debt of US$655.0m, up from US$609.8m in one year. However, its balance sheet shows it holds US$1.06b in cash, so it actually has US$401.8m net cash.

How Strong Is Cytokinetics' Balance Sheet?

The latest balance sheet data shows that Cytokinetics had liabilities of US$102.8m due within a year, and liabilities of US$1.31b falling due after that. On the other hand, it had cash of US$1.06b and US$834.0k worth of receivables due within a year. So its liabilities total US$357.6m more than the combination of its cash and short-term receivables.

Given Cytokinetics has a market capitalization of US$6.48b, it's hard to believe these liabilities pose much threat. 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! There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Cytokinetics had a loss before interest and tax, and actually shrunk its revenue by 69%, to US$3.1m. To be frank that doesn't bode well.

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$423m of cash and made a loss of US$545m. But at least it has US$401.8m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Cytokinetics 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.