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Kindred Biosciences (NASDAQ:KIN) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Kindred Biosciences, Inc. (NASDAQ:KIN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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View our latest analysis for Kindred Biosciences

How Much Debt Does Kindred Biosciences Carry?

As you can see below, at the end of September 2019, Kindred Biosciences had US$19.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$87.4m in cash, leading to a US$68.3m net cash position.

NasdaqCM:KIN Historical Debt, February 4th 2020
NasdaqCM:KIN Historical Debt, February 4th 2020

How Strong Is Kindred Biosciences's Balance Sheet?

We can see from the most recent balance sheet that Kindred Biosciences had liabilities of US$10.1m falling due within a year, and liabilities of US$20.0m due beyond that. On the other hand, it had cash of US$87.4m and US$801.0k worth of receivables due within a year. So it can boast US$58.1m more liquid assets than total liabilities.

It's good to see that Kindred Biosciences has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Kindred Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kindred Biosciences 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, Kindred Biosciences reported revenue of US$4.2m, which is a gain of 553%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Kindred Biosciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Kindred Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$68m of cash and made a loss of US$61m. However, it has net cash of US$68.3m, so it has a bit of time before it will need more capital. The good news for shareholders is that Kindred Biosciences 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. 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. Case in point: We've spotted 3 warning signs for Kindred Biosciences you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.