Warren Buffett famously said, '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. As with many other companies Avid Bioservices, Inc. (NASDAQ:CDMO) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Avid Bioservices's Debt?

The image below, which you can click on for greater detail, shows that at July 2024 Avid Bioservices had debt of US$153.9m, up from US$140.9m in one year. On the flip side, it has US$36.8m in cash leading to net debt of about US$117.1m.

How Strong Is Avid Bioservices' Balance Sheet?

The latest balance sheet data shows that Avid Bioservices had liabilities of US$71.1m due within a year, and liabilities of US$204.9m falling due after that. On the other hand, it had cash of US$36.8m and US$35.2m worth of receivables due within a year. So it has liabilities totalling US$204.1m 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$672.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Avid Bioservices'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, Avid Bioservices made a loss at the EBIT level, and saw its revenue drop to US$142m, which is a fall of 5.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Avid Bioservices had an earnings before interest and tax (EBIT) loss over the last year. 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$11m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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, we've discovered 1 warning sign for Avid Bioservices that you should be aware of before investing here.

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.