Warren Buffett famously said, '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 Arcus Biosciences, Inc. (NYSE:RCUS) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Arcus Biosciences Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2023 Arcus Biosciences had US$121.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$759.0m in cash, so it actually has US$638.0m net cash.
A Look At Arcus Biosciences' Liabilities
The latest balance sheet data shows that Arcus Biosciences had liabilities of US$184.0m due within a year, and liabilities of US$449.0m falling due after that. On the other hand, it had cash of US$759.0m and US$42.0m worth of receivables due within a year. So it can boast US$168.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Arcus Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Arcus Biosciences 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 Arcus Biosciences'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, Arcus Biosciences reported revenue of US$237m, which is a gain of 99%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Arcus Biosciences?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Arcus Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$330m of cash and made a loss of US$231m. But at least it has US$638.0m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Arcus Biosciences may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Arcus Biosciences , and understanding them should be part of your investment process.
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.