AVEO Pharmaceuticals (NASDAQ:AVEO) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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 can see that AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 AVEO Pharmaceuticals

What Is AVEO Pharmaceuticals's Net Debt?

As you can see below, at the end of September 2021, AVEO Pharmaceuticals had US$33.0m of debt, up from US$13.6m a year ago. Click the image for more detail. But it also has US$94.0m in cash to offset that, meaning it has US$61.0m net cash.

A Look At AVEO Pharmaceuticals' Liabilities

The latest balance sheet data shows that AVEO Pharmaceuticals had liabilities of US$22.4m due within a year, and liabilities of US$35.5m falling due after that. Offsetting these obligations, it had cash of US$94.0m as well as receivables valued at US$9.51m due within 12 months. So it actually has US$45.7m more liquid assets than total liabilities.

It's good to see that AVEO Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, AVEO 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 AVEO Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, AVEO Pharmaceuticals reported revenue of US$26m, which is a gain of 333%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is AVEO Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year AVEO Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$58m of cash and made a loss of US$58m. Given it only has net cash of US$61.0m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, AVEO Pharmaceuticals's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with AVEO Pharmaceuticals .

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.

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