Is Arcutis Biotherapeutics (NASDAQ:ARQT) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Arcutis Biotherapeutics

What Is Arcutis Biotherapeutics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Arcutis Biotherapeutics had US$196.8m of debt, an increase on none, over one year. But it also has US$477.0m in cash to offset that, meaning it has US$280.2m net cash.

A Look At Arcutis Biotherapeutics' Liabilities

According to the last reported balance sheet, Arcutis Biotherapeutics had liabilities of US$37.1m due within 12 months, and liabilities of US$201.0m due beyond 12 months. Offsetting this, it had US$477.0m in cash and US$2.43m in receivables that were due within 12 months. So it can boast US$241.3m more liquid assets than total liabilities.

This surplus suggests that Arcutis Biotherapeutics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Arcutis Biotherapeutics 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 Arcutis Biotherapeutics 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.

While it hasn't made a profit, at least Arcutis Biotherapeutics booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Arcutis Biotherapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Arcutis Biotherapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$262m and booked a US$311m accounting loss. But the saving grace is the US$280.2m on the balance sheet. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Arcutis Biotherapeutics you should be aware of, and 1 of them is a bit unpleasant.

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.