We Think Abpro Bio (KOSDAQ:195990) Has A Fair Chunk Of Debt

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.' 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. We note that Abpro Bio Co., Ltd. (KOSDAQ:195990) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Abpro Bio

What Is Abpro Bio's Net Debt?

As you can see below, at the end of June 2024, Abpro Bio had ₩18.0b of debt, up from ₩13.2b a year ago. Click the image for more detail. However, it does have ₩7.88b in cash offsetting this, leading to net debt of about ₩10.1b.

How Healthy Is Abpro Bio's Balance Sheet?

The latest balance sheet data shows that Abpro Bio had liabilities of ₩24.7b due within a year, and liabilities of ₩6.02b falling due after that. On the other hand, it had cash of ₩7.88b and ₩9.89b worth of receivables due within a year. So it has liabilities totalling ₩12.9b more than its cash and near-term receivables, combined.

Of course, Abpro Bio has a market capitalization of ₩154.3b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Abpro Bio had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩19b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Abpro Bio's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩13b 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 ₩9.7b of cash over the last year. 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. Case in point: We've spotted 1 warning sign for Abpro Bio you should be aware of.

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.