Is Avid Bioservices (NASDAQ:CDMO) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Avid Bioservices, Inc. (NASDAQ:CDMO) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Avid Bioservices

How Much Debt Does Avid Bioservices Carry?

The image below, which you can click on for greater detail, shows that at April 2024 Avid Bioservices had debt of US$153.6m, up from US$140.6m in one year. However, because it has a cash reserve of US$42.5m, its net debt is less, at about US$111.1m.

A Look At Avid Bioservices' Liabilities

We can see from the most recent balance sheet that Avid Bioservices had liabilities of US$70.6m falling due within a year, and liabilities of US$205.1m due beyond that. Offsetting this, it had US$42.5m in cash and US$29.0m in receivables that were due within 12 months. So it has liabilities totalling US$204.2m 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$672.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Avid Bioservices 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 Avid Bioservices had a loss before interest and tax, and actually shrunk its revenue by 6.3%, to US$140m. That's not what we would hope to see.

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$19m. 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. Another cause for caution is that is bled US$21m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Avid Bioservices you should know about.

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.