Stock Analysis

Is Arcturus Therapeutics Holdings (NASDAQ:ARCT) Using Debt In A Risky Way?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. 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?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Arcturus Therapeutics Holdings

How Much Debt Does Arcturus Therapeutics Holdings Carry?

As you can see below, at the end of March 2021, Arcturus Therapeutics Holdings had US$61.3m of debt, up from US$15.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$466.8m in cash, so it actually has US$405.6m net cash.

NasdaqGM:ARCT Debt to Equity History July 18th 2021

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$53.3m falling due within a year, and liabilities of US$75.5m due beyond that. Offsetting this, it had US$466.8m in cash and US$2.01m in receivables that were due within 12 months. So it actually has US$340.0m 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! 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.

Over 12 months, Arcturus Therapeutics Holdings made a loss at the EBIT level, and saw its revenue drop to US$9.0m, which is a fall of 53%. To be frank that doesn't bode well.

So How Risky Is Arcturus Therapeutics Holdings?

Statistically speaking companies that lose money are riskier than those that make money. 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$76m and booked a US$119m accounting loss. But the saving grace is the US$405.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Arcturus Therapeutics Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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