Is Arrowhead Pharmaceuticals (NASDAQ:ARWR) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Arrowhead Pharmaceuticals

How Much Debt Does Arrowhead Pharmaceuticals Carry?

As you can see below, at the end of June 2023, Arrowhead Pharmaceuticals had US$263.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$451.7m in cash, so it actually has US$188.6m net cash.

How Strong Is Arrowhead Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Arrowhead Pharmaceuticals had liabilities of US$70.2m due within 12 months, and liabilities of US$343.6m due beyond 12 months. On the other hand, it had cash of US$451.7m and US$1.25m worth of receivables due within a year. So it can boast US$39.1m more liquid assets than total liabilities.

This state of affairs indicates that Arrowhead Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$3.02b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Arrowhead Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Arrowhead Pharmaceuticals 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 Arrowhead Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to US$256m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Arrowhead Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Arrowhead Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$343m of cash and made a loss of US$181m. With only US$188.6m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Arrowhead Pharmaceuticals you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.