Is Abbisko Cayman (HKG:2256) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Abbisko Cayman Limited (HKG:2256) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Abbisko Cayman's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Abbisko Cayman had CN¥109.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥2.38b in cash, so it actually has CN¥2.27b net cash.

How Healthy Is Abbisko Cayman's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Abbisko Cayman had liabilities of CN¥206.7m due within 12 months and liabilities of CN¥11.3m due beyond that. Offsetting this, it had CN¥2.38b in cash and CN¥2.37m in receivables that were due within 12 months. So it actually has CN¥2.17b more liquid assets than total liabilities.

This surplus suggests that Abbisko Cayman is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Abbisko Cayman has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Abbisko Cayman

Although Abbisko Cayman made a loss at the EBIT level, last year, it was also good to see that it generated CN¥85m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Abbisko Cayman 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Abbisko Cayman may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Abbisko Cayman actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Abbisko Cayman has net cash of CN¥2.27b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥124m, being 146% of its EBIT. So we don't think Abbisko Cayman's use of debt is risky. 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. We've identified 1 warning sign with Abbisko Cayman , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.