Is Arrowhead Pharmaceuticals (NASDAQ:ARWR) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Arrowhead Pharmaceuticals

What Is Arrowhead Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Arrowhead Pharmaceuticals had debt of US$280.9m, up from US$257.9m in one year. But it also has US$520.9m in cash to offset that, meaning it has US$240.0m net cash.

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$65.2m due within 12 months and liabilities of US$394.6m due beyond that. Offsetting this, it had US$520.9m in cash and US$1.25m in receivables that were due within 12 months. So it can boast US$62.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Arrowhead Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Arrowhead Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Arrowhead Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Arrowhead Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 87%, to US$35m. To be frank that doesn't bode well.

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. And over the same period it saw negative free cash outflow of US$470m and booked a US$471m accounting loss. But at least it has US$240.0m on the balance sheet to spend on growth, near-term. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Arrowhead Pharmaceuticals that you should be aware of before investing here.

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.