Is Arcus Biosciences (NYSE:RCUS) A Risky Investment?

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, Arcus Biosciences, Inc. (NYSE:RCUS) does carry debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Arcus Biosciences

What Is Arcus Biosciences's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Arcus Biosciences had debt of US$68.0m, up from none in one year. But it also has US$1.09b in cash to offset that, meaning it has US$1.02b net cash.

A Look At Arcus Biosciences' Liabilities

According to the last reported balance sheet, Arcus Biosciences had liabilities of US$215.0m due within 12 months, and liabilities of US$472.0m due beyond 12 months. On the other hand, it had cash of US$1.09b and US$21.0m worth of receivables due within a year. So it can boast US$423.0m more liquid assets than total liabilities.

This surplus strongly suggests that Arcus Biosciences has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Arcus Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Arcus Biosciences 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.

In the last year Arcus Biosciences wasn't profitable at an EBIT level, but managed to grow its revenue by 119%, to US$263m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Arcus Biosciences?

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 Arcus Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$169m of cash and made a loss of US$270m. While this does make the company a bit risky, it's important to remember it has net cash of US$1.02b. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Arcus Biosciences has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. We've identified 1 warning sign with Arcus Biosciences , and understanding them should be part of your investment process.

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.