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 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Arcutis Biotherapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that Arcutis Biotherapeutics had US$203.8m in debt in June 2024; about the same as the year before. But it also has US$362.4m in cash to offset that, meaning it has US$158.6m net cash.

How Healthy Is Arcutis Biotherapeutics' Balance Sheet?

The latest balance sheet data shows that Arcutis Biotherapeutics had liabilities of US$51.4m due within a year, and liabilities of US$207.0m falling due after that. Offsetting this, it had US$362.4m in cash and US$43.4m in receivables that were due within 12 months. So it can boast US$147.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Arcutis Biotherapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Arcutis Biotherapeutics 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 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.

Over 12 months, Arcutis Biotherapeutics reported revenue of US$132m, which is a gain of 1,033%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Arcutis Biotherapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Arcutis Biotherapeutics 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$177m and booked a US$199m accounting loss. However, it has net cash of US$158.6m, 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. 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. For example Arcutis Biotherapeutics has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.