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. We can see that Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Arrowhead Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Arrowhead Pharmaceuticals had US$280.9m of debt, an increase on US$257.9m, over one year. However, its balance sheet shows it holds US$520.9m in cash, so it actually has US$240.0m net cash.

How Healthy Is Arrowhead Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arrowhead Pharmaceuticals had liabilities of US$65.2m due within 12 months and liabilities of US$394.6m due beyond that. Offsetting this, it had US$520.9m in cash and US$1.25m in receivables that were due within 12 months. So it can boast US$62.4m more liquid assets than total liabilities.

Having regard to Arrowhead Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$3.49b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Arrowhead Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Arrowhead Pharmaceuticals's ability to maintain a healthy balance sheet going forward. 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, Arrowhead Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$35m, which is a fall of 87%. To be frank that doesn't bode well.

So How Risky Is Arrowhead Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Arrowhead Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$470m and booked a US$471m accounting loss. However, it has net cash of US$240.0m, so it has a bit of time before it will need more capital. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Arrowhead Pharmaceuticals is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com