Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Avid Bioservices Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2024 Avid Bioservices had US$153.6m of debt, an increase on US$140.6m, over one year. However, it also had US$42.5m in cash, and so its net debt is US$111.1m.

How Healthy Is Avid Bioservices' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Avid Bioservices had liabilities of US$70.6m due within 12 months and liabilities of US$205.1m due beyond that. Offsetting these obligations, it had cash of US$42.5m as well as receivables valued at US$29.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$204.2m.

While this might seem like a lot, it is not so bad since Avid Bioservices has a market capitalization of US$529.0m, 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.

Over 12 months, Avid Bioservices made a loss at the EBIT level, and saw its revenue drop to US$140m, which is a fall of 6.3%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Avid Bioservices produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$19m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$21m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Avid Bioservices that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com