Rock star Growth Puts AVEO Pharmaceuticals (NASDAQ:AVEO) In A Position To Use Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for AVEO Pharmaceuticals

How Much Debt Does AVEO Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 AVEO Pharmaceuticals had US$38.2m of debt, an increase on US$32.4m, over one year. However, its balance sheet shows it holds US$79.0m in cash, so it actually has US$40.8m net cash.

How Strong Is AVEO Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that AVEO Pharmaceuticals had liabilities of US$20.3m due within a year, and liabilities of US$41.0m falling due after that. Offsetting these obligations, it had cash of US$79.0m as well as receivables valued at US$13.8m due within 12 months. So it actually has US$31.5m 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that AVEO Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year AVEO Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 757%, to US$61m. 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 we do note that AVEO 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$47m and booked a US$41m accounting loss. Given it only has net cash of US$40.8m, 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. To that end, you should be aware of the 1 warning sign we've spotted with AVEO Pharmaceuticals .

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.

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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.