Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Arrowhead Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Arrowhead Pharmaceuticals had debt of US$336.0m, up from US$263.1m in one year. However, its balance sheet shows it holds US$434.5m in cash, so it actually has US$98.4m net cash.

How Healthy Is Arrowhead Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Arrowhead Pharmaceuticals had liabilities of US$96.7m due within 12 months, and liabilities of US$448.1m due beyond 12 months. Offsetting this, it had US$434.5m in cash and US$1.25m in receivables that were due within 12 months. So it has liabilities totalling US$109.1m more than its cash and near-term receivables, combined.

Since publicly traded Arrowhead Pharmaceuticals shares are worth a total of US$2.48b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Arrowhead Pharmaceuticals 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 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.

In the last year Arrowhead Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 92%, to US$20m. 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$533m and booked a US$539m accounting loss. Given it only has net cash of US$98.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Arrowhead Pharmaceuticals is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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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.