Is ABIONYX Pharma (EPA:ABNX) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, ABIONYX Pharma SA (EPA:ABNX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ABIONYX Pharma

What Is ABIONYX Pharma's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 ABIONYX Pharma had €2.39m of debt, an increase on €2.04m, over one year. On the flip side, it has €1.93m in cash leading to net debt of about €455.0k.

How Strong Is ABIONYX Pharma's Balance Sheet?

According to the last reported balance sheet, ABIONYX Pharma had liabilities of €5.73m due within 12 months, and liabilities of €3.31m due beyond 12 months. On the other hand, it had cash of €1.93m and €3.43m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.67m.

Of course, ABIONYX Pharma has a market capitalization of €36.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, ABIONYX Pharma has virtually no net debt, 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 ultimately the future profitability of the business will decide if ABIONYX Pharma 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, ABIONYX Pharma reported revenue of €4.8m, which is a gain of 46%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate ABIONYX Pharma's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable €3.9m at the EBIT level. 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. However, it doesn't help that it burned through €2.3m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. 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 5 warning signs for ABIONYX Pharma (of which 2 are a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.