Is Arrowhead Pharmaceuticals (NASDAQ:ARWR) A Risky Investment?

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 can see that Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Arrowhead Pharmaceuticals

What Is Arrowhead Pharmaceuticals's Net Debt?

As you can see below, at the end of June 2024, Arrowhead Pharmaceuticals had US$336.0m of debt, up from US$263.1m a year ago. Click the image for more detail. But on the other hand it also has US$434.5m in cash, leading to a US$98.4m net cash position.

How Strong Is Arrowhead Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arrowhead Pharmaceuticals had liabilities of US$96.7m due within 12 months and liabilities of US$448.1m due beyond that. Offsetting this, it had US$434.5m in cash and US$1.25m in receivables that were due within 12 months. So its liabilities total US$109.1m more than the combination of its cash and short-term receivables.

Since publicly traded Arrowhead Pharmaceuticals shares are worth a total of US$2.39b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Arrowhead Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Arrowhead Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Arrowhead Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$20m, which is a fall of 92%. That makes us nervous, to say the least.

So How Risky Is Arrowhead Pharmaceuticals?

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 Arrowhead Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$533m and booked a US$539m accounting loss. Given it only has net cash of US$98.4m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 3 warning signs with Arrowhead Pharmaceuticals (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.