ABVC BioPharma (NASDAQ:ABVC) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that ABVC BioPharma, Inc. (NASDAQ:ABVC) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ABVC BioPharma

How Much Debt Does ABVC BioPharma Carry?

As you can see below, ABVC BioPharma had US$1.57m of debt at June 2022, down from US$4.86m a year prior. But on the other hand it also has US$2.99m in cash, leading to a US$1.42m net cash position.

How Healthy Is ABVC BioPharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ABVC BioPharma had liabilities of US$3.65m due within 12 months and liabilities of US$956.3k due beyond that. On the other hand, it had cash of US$2.99m and US$4.15m worth of receivables due within a year. So it actually has US$2.54m more liquid assets than total liabilities.

This surplus suggests that ABVC BioPharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ABVC BioPharma 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 ABVC BioPharma'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, ABVC BioPharma shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is ABVC BioPharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ABVC BioPharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$11m and booked a US$18m accounting loss. With only US$1.42m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 6 warning signs for ABVC BioPharma (3 shouldn't be ignored!) 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. 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.