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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies ABVC BioPharma, Inc. (NASDAQ:ABVC) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. 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.
See our latest analysis for ABVC BioPharma
What Is ABVC BioPharma's Net Debt?
The chart below, which you can click on for greater detail, shows that ABVC BioPharma had US$4.84m in debt in March 2021; about the same as the year before. However, it also had US$2.62m in cash, and so its net debt is US$2.22m.
How Strong Is ABVC BioPharma's Balance Sheet?
According to the last reported balance sheet, ABVC BioPharma had liabilities of US$4.67m due within 12 months, and liabilities of US$4.13m due beyond 12 months. Offsetting these obligations, it had cash of US$2.62m as well as receivables valued at US$1.09m due within 12 months. So its liabilities total US$5.09m more than the combination of its cash and short-term receivables.
Since publicly traded ABVC BioPharma shares are worth a total of US$66.4m, it seems unlikely that this level of liabilities would be a major threat. 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 ultimately the future profitability of the business will decide if ABVC BioPharma 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 ABVC BioPharma wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$667k. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months ABVC BioPharma produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$8.6m 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. Another cause for caution is that is bled US$6.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 6 warning signs for ABVC BioPharma (2 can't be ignored!) 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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About NasdaqCM:ABVC
ABVC BioPharma
A clinical stage biopharmaceutical company, develops drugs and medical devices to fulfill unmet medical needs in the United States.
Medium-low with mediocre balance sheet.