The direct benefit for Arcturus Therapeutics Ltd (NASDAQ:ARCT), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is ARCT will have to adhere to stricter debt covenants and have less financial flexibility. While ARCT has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ARCT’s financial health.
Is ARCT growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. ARCT’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. Opposite to the high growth we were expecting, ARCT’s negative revenue growth of -51% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ARCT pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Arcturus Therapeutics has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at ARCT’s most recent US$18m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.28x. For Biotechs companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
ARCT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, ARCT’s financial situation may change. I admit this is a fairly basic analysis for ARCT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Arcturus Therapeutics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARCT’s future growth? Take a look at our free research report of analyst consensus for ARCT’s outlook.
- Historical Performance: What has ARCT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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