Is ABIVAX Société Anonyme (EPA:ABVX) Using Too Much Debt?

Simply Wall St
June 06, 2021
Source: Shutterstock

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies ABIVAX Société Anonyme (EPA:ABVX) makes use of debt. But the more important question is: how much risk is that debt creating?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for ABIVAX Société Anonyme

How Much Debt Does ABIVAX Société Anonyme Carry?

As you can see below, at the end of December 2020, ABIVAX Société Anonyme had €34.0m of debt, up from €20.7m a year ago. Click the image for more detail. However, it also had €29.3m in cash, and so its net debt is €4.68m.

ENXTPA:ABVX Debt to Equity History June 7th 2021

How Healthy Is ABIVAX Société Anonyme's Balance Sheet?

We can see from the most recent balance sheet that ABIVAX Société Anonyme had liabilities of €24.9m falling due within a year, and liabilities of €28.5m due beyond that. Offsetting these obligations, it had cash of €29.3m as well as receivables valued at €2.77m due within 12 months. So it has liabilities totalling €21.3m more than its cash and near-term receivables, combined.

Since publicly traded ABIVAX Société Anonyme shares are worth a total of €400.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, ABIVAX Société Anonyme has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ABIVAX Société Anonyme can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, ABIVAX Société Anonyme shareholders no doubt hope it can fund itself until it has a profitable product.

Caveat Emptor

Over the last twelve months ABIVAX Société Anonyme produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €40m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €31m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for ABIVAX Société Anonyme (of which 2 are 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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