Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) does carry debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for Arcutis Biotherapeutics
What Is Arcutis Biotherapeutics’s Debt?
As you can see below, Arcutis Biotherapeutics had US$202.8m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$403.9m in cash, so it actually has US$201.1m net cash.
How Strong Is Arcutis Biotherapeutics’ Balance Sheet?
The latest balance sheet data shows that Arcutis Biotherapeutics had liabilities of US$47.3m due within a year, and liabilities of US$206.3m falling due after that. Offsetting this, it had US$403.9m in cash and US$37.2m in receivables that were due within 12 months. So it actually has US$187.4m more liquid assets than total liabilities.
It’s good to see that Arcutis Biotherapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Arcutis Biotherapeutics 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 ultimately the future profitability of the business will decide if Arcutis Biotherapeutics 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.
In the last year Arcutis Biotherapeutics wasn’t profitable at an EBIT level, but managed to grow its revenue by 1,545%, to US$106m. That’s virtually the hole-in-one of revenue growth!
So How Risky Is Arcutis Biotherapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Arcutis Biotherapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$199m of cash and made a loss of US$217m. However, it has net cash of US$201.1m, so it has a bit of time before it will need more capital. The good news for shareholders is that Arcutis Biotherapeutics 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. However, not all investment risk resides within the balance sheet – far from it. We’ve identified 3 warning signs with Arcutis Biotherapeutics (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
Valuation is complex, but we’re helping make it simple.
Find out whether Arcutis Biotherapeutics is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Valuation is complex, but we’re helping make it simple.
Find out whether Arcutis Biotherapeutics is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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