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.' 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. Importantly, Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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.
What Is Arcturus Therapeutics Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Arcturus Therapeutics Holdings had US$60.8m of debt, an increase on US$15.1m, over one year. But on the other hand it also has US$413.9m in cash, leading to a US$353.1m net cash position.
A Look At Arcturus Therapeutics Holdings' Liabilities
The latest balance sheet data shows that Arcturus Therapeutics Holdings had liabilities of US$118.2m due within a year, and liabilities of US$57.2m falling due after that. Offsetting this, it had US$413.9m in cash and US$2.02m in receivables that were due within 12 months. So it can boast US$240.5m more liquid assets than total liabilities.
This excess liquidity is a great indication that Arcturus Therapeutics Holdings' balance sheet is almost as strong as Fort Knox. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$8.8m. That's not what we would hope to see.
So How Risky Is Arcturus Therapeutics Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Arcturus Therapeutics Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$102m of cash and made a loss of US$196m. While this does make the company a bit risky, it's important to remember it has net cash of US$353.1m. That means it could keep spending at its current rate for more than two years. 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. 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. For instance, we've identified 1 warning sign for Arcturus Therapeutics Holdings that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.