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. We can see that Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Arrowhead Pharmaceuticals

What Is Arrowhead Pharmaceuticals's Debt?

As you can see below, at the end of September 2023, Arrowhead Pharmaceuticals had US$268.3m of debt, up from none a year ago. Click the image for more detail. However, it does have US$395.7m in cash offsetting this, leading to net cash of US$127.4m.

A Look At Arrowhead Pharmaceuticals' Liabilities

The latest balance sheet data shows that Arrowhead Pharmaceuticals had liabilities of US$105.5m due within a year, and liabilities of US$372.9m falling due after that. Offsetting this, it had US$395.7m in cash and US$1.25m in receivables that were due within 12 months. So its liabilities total US$81.4m more than the combination of its cash and short-term receivables.

Given Arrowhead Pharmaceuticals has a market capitalization of US$2.65b, it's hard to believe these liabilities pose much 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! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Arrowhead Pharmaceuticals 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 Arrowhead Pharmaceuticals's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Arrowhead Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Arrowhead Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$331m of cash and made a loss of US$205m. With only US$127.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 4 warning signs with Arrowhead Pharmaceuticals (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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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.