Health Check: How Prudently Does Avadel Pharmaceuticals (NASDAQ:AVDL) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Avadel Pharmaceuticals plc (NASDAQ:AVDL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Avadel Pharmaceuticals

What Is Avadel Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Avadel Pharmaceuticals had debt of US$142.1m, up from US$126.5m in one year. But on the other hand it also has US$181.1m in cash, leading to a US$39.0m net cash position.

How Strong Is Avadel Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Avadel Pharmaceuticals had liabilities of US$17.6m due within 12 months and liabilities of US$147.5m due beyond that. On the other hand, it had cash of US$181.1m and US$21.3m worth of receivables due within a year. So it can boast US$37.2m 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. Succinctly put, Avadel Pharmaceuticals 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 ultimately the future profitability of the business will decide if Avadel Pharmaceuticals 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Avadel Pharmaceuticals can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Avadel Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Avadel Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$74m of cash and made a loss of US$66m. But the saving grace is the US$39.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Avadel Pharmaceuticals is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.