David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Abpro Bio Co., Ltd. (KOSDAQ:195990) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Abpro Bio
What Is Abpro Bio's Debt?
The image below, which you can click on for greater detail, shows that Abpro Bio had debt of ₩11.0b at the end of December 2020, a reduction from ₩41.0b over a year. But on the other hand it also has ₩30.9b in cash, leading to a ₩19.9b net cash position.
How Strong Is Abpro Bio's Balance Sheet?
We can see from the most recent balance sheet that Abpro Bio had liabilities of ₩14.8b falling due within a year, and liabilities of ₩13.0b due beyond that. On the other hand, it had cash of ₩30.9b and ₩4.84b worth of receivables due within a year. So it actually has ₩7.89b more liquid assets than total liabilities.
This surplus suggests that Abpro Bio has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Abpro Bio 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 you can't view debt in total isolation; since Abpro Bio will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Abpro Bio reported revenue of ₩49b, which is a gain of 55%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Abpro Bio?
While Abpro Bio lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩2.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 55% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Abpro Bio (1 is a bit concerning!) that you should be aware of before investing here.
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. 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.
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About KOSDAQ:A195990
Abpro Bio
Engages in the manufacture and sale of various machine tools in South Korea and internationally.
Excellent balance sheet very low.
