Here's Why AVEO Pharmaceuticals (NASDAQ:AVEO) Can Manage Its Debt Despite Losing Money

Warren Buffett famously said, '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. Importantly, AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for AVEO Pharmaceuticals

What Is AVEO Pharmaceuticals's Net Debt?

As you can see below, at the end of June 2022, AVEO Pharmaceuticals had US$38.4m of debt, up from US$32.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$77.2m in cash, so it actually has US$38.7m net cash.

How Strong Is AVEO Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, AVEO Pharmaceuticals had liabilities of US$31.5m due within 12 months, and liabilities of US$36.0m due beyond 12 months. On the other hand, it had cash of US$77.2m and US$16.1m worth of receivables due within a year. So it actually has US$25.8m more liquid assets than total liabilities.

This short term liquidity is a sign that AVEO Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AVEO Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, AVEO Pharmaceuticals reported revenue of US$79m, which is a gain of 466%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is AVEO 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 AVEO Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$31m of cash and made a loss of US$36m. With only US$38.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, AVEO 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how AVEO Pharmaceuticals's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.