Is Avadel Pharmaceuticals (NASDAQ:AVDL) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Avadel Pharmaceuticals

What Is Avadel Pharmaceuticals's Debt?

As you can see below, Avadel Pharmaceuticals had US$20.9m of debt at June 2023, down from US$134.3m a year prior. But it also has US$160.5m in cash to offset that, meaning it has US$139.7m net cash.

How Strong Is Avadel Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Avadel Pharmaceuticals had liabilities of US$51.5m due within a year, and liabilities of US$6.28m falling due after that. Offsetting these obligations, it had cash of US$160.5m as well as receivables valued at US$2.82m due within 12 months. So it can boast US$105.5m 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Avadel Pharmaceuticals managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

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 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$85m and booked a US$143m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$139.7m. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Avadel Pharmaceuticals , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.