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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Avadel Pharmaceuticals

What Is Avadel Pharmaceuticals's Net Debt?

As you can see below, at the end of September 2021, Avadel Pharmaceuticals had US$142.1m of debt, up from US$126.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$181.1m in cash, so it actually has US$39.0m net cash.

How Healthy Is Avadel Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Avadel Pharmaceuticals had liabilities of US$17.6m falling due within a year, and liabilities of US$147.5m due beyond that. Offsetting these obligations, it had cash of US$181.1m as well as receivables valued at US$21.3m due within 12 months. So it actually has US$37.2m more liquid assets than total liabilities.

This surplus suggests that Avadel Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Avadel Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$74m and booked a US$66m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$39.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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 analysing debt levels, the balance sheet is the obvious place to start. 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 concerning.

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.

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

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.