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. Importantly, Arq, Inc. (NASDAQ:ARQ) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Arq
What Is Arq's Debt?
As you can see below, at the end of December 2023, Arq had US$17.5m of debt, up from none a year ago. Click the image for more detail. But it also has US$45.4m in cash to offset that, meaning it has US$27.9m net cash.
A Look At Arq's Liabilities
The latest balance sheet data shows that Arq had liabilities of US$23.0m due within a year, and liabilities of US$34.1m falling due after that. Offsetting this, it had US$45.4m in cash and US$16.2m in receivables that were due within 12 months. So it actually has US$4.45m more liquid assets than total liabilities.
Having regard to Arq's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$224.0m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Arq has more cash than debt is arguably a good indication that 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 Arq'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 Arq had a loss before interest and tax, and actually shrunk its revenue by 3.7%, to US$99m. That's not what we would hope to see.
So How Risky Is Arq?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Arq had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$47m and booked a US$12m accounting loss. Given it only has net cash of US$27.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Arq (including 2 which are a bit concerning) .
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
About NasdaqGM:ARQ
Reasonable growth potential with adequate balance sheet.
