Arcturus Therapeutics Holdings (NASDAQ:ARCT) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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.

Check out our latest analysis for Arcturus Therapeutics Holdings

How Much Debt Does Arcturus Therapeutics Holdings Carry?

The chart below, which you can click on for greater detail, shows that Arcturus Therapeutics Holdings had US$60.7m in debt in December 2022; about the same as the year before. However, it does have US$391.9m in cash offsetting this, leading to net cash of US$331.2m.

How Strong Is Arcturus Therapeutics Holdings' Balance Sheet?

According to the last reported balance sheet, Arcturus Therapeutics Holdings had liabilities of US$127.0m due within 12 months, and liabilities of US$53.1m due beyond 12 months. Offsetting this, it had US$391.9m in cash and US$2.76m in receivables that were due within 12 months. So it actually has US$214.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Arcturus Therapeutics Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Arcturus Therapeutics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Arcturus Therapeutics Holdings turned things around in the last 12 months, delivering and EBIT of US$12m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Arcturus Therapeutics Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Arcturus Therapeutics Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Arcturus Therapeutics Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Arcturus Therapeutics Holdings has US$331.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in US$24m. So is Arcturus Therapeutics Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Arcturus Therapeutics Holdings .

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.

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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.