Is Absci (NASDAQ:ABSI) 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 Absci Corporation (NASDAQ:ABSI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Absci

What Is Absci's Debt?

You can click the graphic below for the historical numbers, but it shows that Absci had US$6.25m of debt in June 2024, down from US$9.52m, one year before. But on the other hand it also has US$145.2m in cash, leading to a US$139.0m net cash position.

A Look At Absci's Liabilities

We can see from the most recent balance sheet that Absci had liabilities of US$25.5m falling due within a year, and liabilities of US$8.57m due beyond that. Offsetting this, it had US$145.2m in cash and US$44.0k in receivables that were due within 12 months. So it actually has US$111.2m more liquid assets than total liabilities.

This surplus suggests that Absci 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 Absci has more cash than debt is arguably a good indication that 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 Absci 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.

In the last year Absci had a loss before interest and tax, and actually shrunk its revenue by 62%, to US$3.3m. That makes us nervous, to say the least.

So How Risky Is Absci?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Absci had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$61m of cash and made a loss of US$92m. But at least it has US$139.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Absci that you should be aware of before investing here.

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.