Arcturus Therapeutics Holdings (NASDAQ:ARCT) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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.' 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. We note that Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Arcturus Therapeutics Holdings

What Is Arcturus Therapeutics Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Arcturus Therapeutics Holdings had US$62.8m in debt in June 2022; about the same as the year before. But it also has US$283.5m in cash to offset that, meaning it has US$220.7m net cash.

How Healthy Is Arcturus Therapeutics Holdings' Balance Sheet?

We can see from the most recent balance sheet that Arcturus Therapeutics Holdings had liabilities of US$92.7m falling due within a year, and liabilities of US$73.6m due beyond that. Offsetting these obligations, it had cash of US$283.5m as well as receivables valued at US$2.25m due within 12 months. So it actually has US$119.4m more liquid assets than total liabilities.

This surplus strongly suggests that Arcturus Therapeutics Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Arcturus Therapeutics Holdings 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 Arcturus Therapeutics Holdings 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.

In the last year Arcturus Therapeutics Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 366%, to US$41m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Arcturus Therapeutics Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Arcturus Therapeutics Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$150m and booked a US$165m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$220.7m. That means it could keep spending at its current rate for more than two years. Importantly, Arcturus Therapeutics Holdings's revenue growth is hot to trot. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Arcturus Therapeutics Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.