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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) does carry debt. But is this debt a concern to shareholders?

We've discovered 4 warning signs about Arrowhead Pharmaceuticals. View them for free.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Arrowhead Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Arrowhead Pharmaceuticals had US$756.2m of debt, an increase on US$273.7m, over one year. However, it also had US$550.8m in cash, and so its net debt is US$205.4m.

A Look At Arrowhead Pharmaceuticals' Liabilities

According to the last reported balance sheet, Arrowhead Pharmaceuticals had liabilities of US$93.8m due within 12 months, and liabilities of US$863.9m due beyond 12 months. Offsetting this, it had US$550.8m in cash and US$2.50m in receivables that were due within 12 months. So it has liabilities totalling US$404.3m more than its cash and near-term receivables, combined.

Arrowhead Pharmaceuticals has a market capitalization of US$1.77b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Check out our latest analysis for Arrowhead Pharmaceuticals

In the last year Arrowhead Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 99%, to US$2.5m. That makes us nervous, to say the least.

Caveat Emptor

While Arrowhead Pharmaceuticals's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$626m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$572m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example - Arrowhead Pharmaceuticals has 4 warning signs we think you should be aware of.

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.