The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Arcutis Biotherapeutics's Net Debt?

As you can see below, Arcutis Biotherapeutics had US$204.6m of debt, at September 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$330.6m in cash, so it actually has US$126.0m net cash.

How Strong Is Arcutis Biotherapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arcutis Biotherapeutics had liabilities of US$172.4m due within 12 months and liabilities of US$108.3m due beyond that. On the other hand, it had cash of US$330.6m and US$60.1m worth of receivables due within a year. So it actually has US$110.0m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Arcutis Biotherapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Arcutis Biotherapeutics reported revenue of US$139m, which is a gain of 183%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Arcutis Biotherapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Arcutis Biotherapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$168m of cash and made a loss of US$196m. However, it has net cash of US$126.0m, so it has a bit of time before it will need more capital. Importantly, Arcutis Biotherapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Arcutis Biotherapeutics that you should be aware of.

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.