David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Avadel Pharmaceuticals plc (NASDAQ:AVDL) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Avadel Pharmaceuticals's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Avadel Pharmaceuticals had debt of US$141.5m, up from US$123.3m in one year. However, it does have US$205.0m in cash offsetting this, leading to net cash of US$63.5m.
A Look At Avadel Pharmaceuticals' Liabilities
Zooming in on the latest balance sheet data, we can see that Avadel Pharmaceuticals had liabilities of US$9.12m due within 12 months and liabilities of US$147.3m due beyond that. Offsetting this, it had US$205.0m in cash and US$3.11m in receivables that were due within 12 months. So it can boast US$51.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Avadel Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Avadel Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Avadel Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Avadel Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 82%, to US$10m. That makes us nervous, to say the least.
So How Risky Is Avadel Pharmaceuticals?
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 Avadel Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$61m and booked a US$5.6m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$63.5m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Avadel Pharmaceuticals insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.