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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 ABIVAX Société Anonyme (EPA:ABVX) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ABIVAX Société Anonyme

What Is ABIVAX Société Anonyme's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 ABIVAX Société Anonyme had debt of €53.4m, up from €34.0m in one year. However, its balance sheet shows it holds €60.7m in cash, so it actually has €7.26m net cash.

How Strong Is ABIVAX Société Anonyme's Balance Sheet?

We can see from the most recent balance sheet that ABIVAX Société Anonyme had liabilities of €36.5m falling due within a year, and liabilities of €38.2m due beyond that. Offsetting this, it had €60.7m in cash and €4.70m in receivables that were due within 12 months. So it has liabilities totalling €9.35m more than its cash and near-term receivables, combined.

Of course, ABIVAX Société Anonyme has a market capitalization of €264.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ABIVAX Société Anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 ABIVAX Société Anonyme 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.

Since ABIVAX Société Anonyme doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is ABIVAX Société Anonyme?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ABIVAX Société Anonyme had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €47m of cash and made a loss of €41m. With only €7.26m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with ABIVAX Société Anonyme (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.