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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. Importantly, Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Arcturus Therapeutics Holdings Carry?
As you can see below, Arcturus Therapeutics Holdings had US$15.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$462.9m in cash to offset that, meaning it has US$447.8m net cash.
How Healthy Is Arcturus Therapeutics Holdings' Balance Sheet?
We can see from the most recent balance sheet that Arcturus Therapeutics Holdings had liabilities of US$49.5m falling due within a year, and liabilities of US$30.4m due beyond that. Offsetting this, it had US$462.9m in cash and US$2.13m in receivables that were due within 12 months. So it can boast US$385.1m more liquid assets than total liabilities.
This surplus liquidity suggests that Arcturus Therapeutics Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Arcturus Therapeutics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Arcturus Therapeutics Holdings 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.
Over 12 months, Arcturus Therapeutics Holdings made a loss at the EBIT level, and saw its revenue drop to US$9.5m, which is a fall of 54%. To be frank that doesn't bode well.
So How Risky Is Arcturus Therapeutics Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Arcturus Therapeutics Holdings 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$45m and booked a US$72m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$447.8m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Arcturus Therapeutics Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.
This article by Simply Wall St is general in nature. 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.
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