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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Arcturus Therapeutics Holdings's Net Debt?
As you can see below, Arcturus Therapeutics Holdings had US$15.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$462.9m in cash offsetting this, leading to net cash of US$447.8m.
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$49.5m falling due within a year, and liabilities of US$30.4m due beyond that. Offsetting this, it had US$462.9m in cash and US$2.13m in receivables that were due within 12 months. So it can boast US$385.1m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Arcturus Therapeutics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Arcturus Therapeutics Holdings'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, Arcturus Therapeutics Holdings made a loss at the EBIT level, and saw its revenue drop to US$9.5m, which is a fall of 54%. That makes us nervous, to say the least.
So How Risky Is Arcturus Therapeutics Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Arcturus Therapeutics Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$45m and booked a US$72m accounting loss. But the saving grace is the US$447.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 2 warning signs with Arcturus Therapeutics Holdings (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
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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