David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Arcturus Therapeutics Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Arcturus Therapeutics Holdings had US$9.24m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$74.2m in cash, so it actually has US$64.9m net cash.
A Look At Arcturus Therapeutics Holdings's Liabilities
The latest balance sheet data shows that Arcturus Therapeutics Holdings had liabilities of US$21.7m due within a year, and liabilities of US$29.6m falling due after that. Offsetting these obligations, it had cash of US$74.2m as well as receivables valued at US$2.63m due within 12 months. So it can boast US$25.5m more liquid assets than total liabilities.
This excess liquidity suggests that Arcturus Therapeutics Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Arcturus Therapeutics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Arcturus Therapeutics Holdings 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.
Over 12 months, Arcturus Therapeutics Holdings reported revenue of US$25m, which is a gain of 149%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Arcturus Therapeutics Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Arcturus Therapeutics Holdings had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$9.5m of cash and made a loss of US$16m. While this does make the company a bit risky, it's important to remember it has net cash of US$64.9m. 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 Arcturus Therapeutics Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like Arcturus Therapeutics Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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