The direct benefit for Arcturus Therapeutics Ltd. (NASDAQ:ARCT), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is ARCT will have to adhere to stricter debt covenants and have less financial flexibility. While ARCT has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Is ARCT right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. ARCT’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. ARCT delivered a negative revenue growth of -22%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ARCT pay its short-term liabilities?
Since Arcturus Therapeutics doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at ARCT’s US$14m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.53x. For Biotechs companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
As a high-growth company, it may be beneficial for ARCT to have some financial flexibility, hence zero-debt. Since there is also no concerns around ARCT’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure ARCT has company-specific issues impacting its capital structure decisions. You should continue to research Arcturus Therapeutics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARCT’s future growth? Take a look at our free research report of analyst consensus for ARCT’s outlook.
- Historical Performance: What has ARCT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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