Is Avadel Pharmaceuticals (NASDAQ:AVDL) Using Debt In A Risky Way?

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. 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?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Avadel Pharmaceuticals

How Much Debt Does Avadel Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that Avadel Pharmaceuticals had debt of US$36.3m at the end of September 2024, a reduction from US$52.3m over a year. But it also has US$65.8m in cash to offset that, meaning it has US$29.5m net cash.

A Look At Avadel Pharmaceuticals' Liabilities

The latest balance sheet data shows that Avadel Pharmaceuticals had liabilities of US$42.8m due within a year, and liabilities of US$40.8m falling due after that. Offsetting this, it had US$65.8m in cash and US$37.1m in receivables that were due within 12 months. So it can boast US$19.3m 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. Simply put, the fact that Avadel Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Avadel Pharmaceuticals's ability to maintain a healthy balance sheet going forward. 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 1,524%, to US$138m. That's virtually the hole-in-one of revenue growth!

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$83m and booked a US$73m accounting loss. With only US$29.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Avadel Pharmaceuticals's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Avadel Pharmaceuticals has 2 warning signs we think you should be aware of.

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.