Is Cytokinetics (NASDAQ:CYTK) Using Debt In A Risky Way?
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 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 the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. 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.
See our latest analysis for Cytokinetics
How Much Debt Does Cytokinetics Carry?
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. But on the other hand it also has US$471.6m in cash, leading to a US$328.8m net cash position.
How Healthy Is Cytokinetics' Balance Sheet?
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.
Since publicly traded Cytokinetics shares are worth a total of US$3.41b, 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. 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 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.
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. With any luck the company will be able to grow its way to profitability.
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. Indeed, in that time it burnt through US$191m of cash and made a loss of US$215m. But at least it has US$328.8m on the balance sheet to spend on growth, near-term. 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. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should be aware of the 3 warning signs we've spotted with Cytokinetics .
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.
