Does Avid Bioservices (NASDAQ:CDMO) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Avid Bioservices, Inc. (NASDAQ:CDMO) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Avid Bioservices

What Is Avid Bioservices's Debt?

As you can see below, Avid Bioservices had US$140.9m of debt, at July 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$24.9m in cash leading to net debt of about US$116.0m.

How Strong Is Avid Bioservices' Balance Sheet?

The latest balance sheet data shows that Avid Bioservices had liabilities of US$64.1m due within a year, and liabilities of US$187.7m falling due after that. On the other hand, it had cash of US$24.9m and US$30.7m worth of receivables due within a year. So it has liabilities totalling US$196.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Avid Bioservices has a market capitalization of US$333.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Avid Bioservices can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Avid Bioservices wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$150m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Avid Bioservices had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$93m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Avid Bioservices insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.