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Is Arcturus Therapeutics Holdings (NASDAQ:ARCT) A Risky Investment?

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.' 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, Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Arcturus Therapeutics Holdings

What Is Arcturus Therapeutics Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Arcturus Therapeutics Holdings had US$15.1m of debt, an increase on US$9.98m, over one year. However, its balance sheet shows it holds US$136.1m in cash, so it actually has US$121.1m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Arcturus Therapeutics Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arcturus Therapeutics Holdings had liabilities of US$23.0m due within 12 months and liabilities of US$33.5m due beyond that. Offsetting these obligations, it had cash of US$136.1m as well as receivables valued at US$2.83m due within 12 months. So it can boast US$82.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Arcturus Therapeutics Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Arcturus Therapeutics Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Arcturus Therapeutics Holdings's ability to maintain a healthy balance sheet going forward. 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$11m, which is a fall of 56%. That makes us nervous, to say the least.

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 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$32m and booked a US$38m accounting loss. But the saving grace is the US$121.1m on the balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Arcturus Therapeutics Holdings (including 1 which is is significant) .

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.

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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