Avadel Pharmaceuticals (NASDAQ:AVDL) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Avadel Pharmaceuticals plc (NASDAQ:AVDL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Avadel Pharmaceuticals

What Is Avadel Pharmaceuticals's Debt?

The chart below, which you can click on for greater detail, shows that Avadel Pharmaceuticals had US$142.7m in debt in March 2022; about the same as the year before. However, because it has a cash reserve of US$123.5m, its net debt is less, at about US$19.2m.

How Healthy Is Avadel Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Avadel Pharmaceuticals had liabilities of US$44.0m due within a year, and liabilities of US$121.9m falling due after that. Offsetting this, it had US$123.5m in cash and US$31.5m in receivables that were due within 12 months. So it has liabilities totalling US$10.9m more than its cash and near-term receivables, combined.

Given Avadel Pharmaceuticals has a market capitalization of US$212.5m, 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. There's no doubt that we learn most about debt from the balance sheet. 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.

It seems likely shareholders hope that Avadel Pharmaceuticals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Not only did Avadel Pharmaceuticals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$99m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$88m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Avadel Pharmaceuticals you should be aware of, and 1 of them is potentially serious.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.