Is ABVC BioPharma (NASDAQ:ABVC) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that ABVC BioPharma, Inc. (NASDAQ:ABVC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ABVC BioPharma

What Is ABVC BioPharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ABVC BioPharma had US$1.64m of debt in December 2021, down from US$4.99m, one year before. But on the other hand it also has US$5.94m in cash, leading to a US$4.30m net cash position.

How Strong Is ABVC BioPharma's Balance Sheet?

According to the last reported balance sheet, ABVC BioPharma had liabilities of US$3.69m due within 12 months, and liabilities of US$1.14m due beyond 12 months. Offsetting this, it had US$5.94m in cash and US$1.71m in receivables that were due within 12 months. So it actually has US$2.82m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ABVC BioPharma 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.

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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that ABVC BioPharma had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$8.3m and booked a US$13m accounting loss. With only US$4.30m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. For example ABVC BioPharma has 6 warning signs (and 3 which are a bit concerning) we think you should know about.

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.