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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Avadel Pharmaceuticals

How Much Debt Does Avadel Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Avadel Pharmaceuticals had US$35.5m of debt, an increase on US$20.9m, over one year. But it also has US$71.4m in cash to offset that, meaning it has US$35.9m net cash.

How Strong Is Avadel Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Avadel Pharmaceuticals had liabilities of US$44.6m due within a year, and liabilities of US$42.6m falling due after that. Offsetting this, it had US$71.4m in cash and US$34.3m in receivables that were due within 12 months. So it actually has US$18.5m more liquid assets than total liabilities.

This state of affairs indicates that Avadel Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.39b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Avadel Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Avadel Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 6,260%, to US$95m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Avadel Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Avadel Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$114m and booked a US$106m accounting loss. With only US$35.9m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Avadel Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Avadel Pharmaceuticals you should know about.

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.