Health Check: How Prudently Does Abeona Therapeutics (NASDAQ:ABEO) Use 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 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. Importantly, Abeona Therapeutics Inc. (NASDAQ:ABEO) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Abeona Therapeutics

How Much Debt Does Abeona Therapeutics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Abeona Therapeutics had US$18.7m of debt, an increase on none, over one year. However, it does have US$109.7m in cash offsetting this, leading to net cash of US$91.1m.

A Look At Abeona Therapeutics' Liabilities

According to the last reported balance sheet, Abeona Therapeutics had liabilities of US$18.4m due within 12 months, and liabilities of US$56.4m due beyond 12 months. Offsetting these obligations, it had cash of US$109.7m as well as receivables valued at US$1.61m due within 12 months. So it actually has US$36.5m more liquid assets than total liabilities.

It's good to see that Abeona Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Abeona Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Abeona Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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

So How Risky Is Abeona Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Abeona Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$51m and booked a US$71m accounting loss. But at least it has US$91.1m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. For example, we've discovered 2 warning signs for Abeona Therapeutics that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.