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.' 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, Avadel Pharmaceuticals plc (NASDAQ:AVDL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Avadel Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Avadel Pharmaceuticals had debt of US$35.5m, up from US$20.9m in one year. However, its balance sheet shows it holds US$71.4m in cash, so it actually has US$35.9m net cash.

A Look At Avadel Pharmaceuticals' Liabilities

According to the last reported balance sheet, Avadel Pharmaceuticals had liabilities of US$44.6m due within 12 months, and liabilities of US$42.6m due beyond 12 months. Offsetting these obligations, it had cash of US$71.4m as well as receivables valued at US$34.3m due within 12 months. So it can boast US$18.5m more liquid assets than total liabilities.

This state of affairs indicates that Avadel Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.27b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Avadel 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 Avadel Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Avadel Pharmaceuticals reported revenue of US$95m, which is a gain of 6,260%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Avadel Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Avadel 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$114m and booked a US$106m accounting loss. With only US$35.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Avadel 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 analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Avadel Pharmaceuticals has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.