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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Absci Corporation (NASDAQ:ABSI) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Absci's Debt?

The image below, which you can click on for greater detail, shows that Absci had debt of US$6.25m at the end of June 2024, a reduction from US$9.52m over a year. But on the other hand it also has US$145.2m in cash, leading to a US$139.0m net cash position.

How Strong Is Absci's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Absci had liabilities of US$25.5m due within 12 months and liabilities of US$8.57m due beyond that. Offsetting these obligations, it had cash of US$145.2m as well as receivables valued at US$44.0k due within 12 months. So it can boast US$111.2m more liquid assets than total liabilities.

This excess liquidity suggests that Absci is taking a careful approach to debt. 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. 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 Absci can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Absci had a loss before interest and tax, and actually shrunk its revenue by 62%, to US$3.3m. To be frank that doesn't bode well.

So How Risky Is Absci?

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 Absci lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$61m and booked a US$92m accounting loss. But at least it has US$139.0m 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Absci that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.