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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. Importantly, Abacus Health Products, Inc. (CNSX:ABCS) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Abacus Health Products Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Abacus Health Products had US$2.34m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$12.9m in cash, so it actually has US$10.5m net cash.
A Look At Abacus Health Products’s Liabilities
We can see from the most recent balance sheet that Abacus Health Products had liabilities of US$13.6m falling due within a year, and liabilities of US$2.62m due beyond that. Offsetting these obligations, it had cash of US$12.9m as well as receivables valued at US$2.29m due within 12 months. So its liabilities total US$1.01m more than the combination of its cash and short-term receivables.
Having regard to Abacus Health Products’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$145.3m company is short on cash, but still worth keeping an eye on the balance sheet. Abacus Health Products boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Abacus Health Products’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.
In the last year Abacus Health Products managed to grow its revenue by 175%, to US$11m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Abacus Health Products?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Abacus Health Products had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$5.8m and booked a US$13m accounting loss. With only US$13m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Abacus Health Products’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Abacus Health Products’s profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.