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AVEO Pharmaceuticals (NASDAQ:AVEO) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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
How Much Debt Does AVEO Pharmaceuticals Carry?
The image below, which you can click on for greater detail, shows that at September 2021 AVEO Pharmaceuticals had debt of US$33.0m, up from US$13.6m in one year. But on the other hand it also has US$94.0m in cash, leading to a US$61.0m net cash position.
A Look At AVEO Pharmaceuticals' Liabilities
Zooming in on the latest balance sheet data, we can see that AVEO Pharmaceuticals had liabilities of US$22.4m due within 12 months and liabilities of US$35.5m due beyond that. Offsetting this, it had US$94.0m in cash and US$9.51m in receivables that were due within 12 months. So it actually has US$45.7m more liquid assets than total liabilities.
This excess liquidity is a great indication that AVEO Pharmaceuticals' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, AVEO 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 it is future earnings, more than anything, that will determine AVEO 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 AVEO Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 333%, to US$26m. That's virtually the hole-in-one of revenue growth!
So How Risky Is AVEO Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months AVEO 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$58m and booked a US$58m accounting loss. 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. The good news for shareholders is that AVEO Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 AVEO Pharmaceuticals you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About NasdaqCM:AVEO
AVEO Pharmaceuticals
AVEO Pharmaceuticals, Inc., an oncology-focused biopharmaceutical company, focuses on developing and commercializing medicines for patients with cancer.
Flawless balance sheet with high growth potential.