We Think Angel Seafood Holdings (ASX:AS1) Has A Fair Chunk Of Debt

By
Simply Wall St
Published
November 22, 2021
ASX:AS1
Source: Shutterstock

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 Angel Seafood Holdings Limited (ASX:AS1) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Angel Seafood Holdings

What Is Angel Seafood Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Angel Seafood Holdings had AU$5.07m of debt, an increase on AU$4.69m, over one year. However, it does have AU$2.50m in cash offsetting this, leading to net debt of about AU$2.57m.

debt-equity-history-analysis
ASX:AS1 Debt to Equity History November 22nd 2021

How Healthy Is Angel Seafood Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Angel Seafood Holdings had liabilities of AU$4.00m due within 12 months and liabilities of AU$5.90m due beyond that. Offsetting these obligations, it had cash of AU$2.50m as well as receivables valued at AU$719.3k due within 12 months. So it has liabilities totalling AU$6.69m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Angel Seafood Holdings is worth AU$21.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Angel Seafood Holdings 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.

Over 12 months, Angel Seafood Holdings reported revenue of AU$8.7m, which is a gain of 73%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Angel Seafood Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at AU$818k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 AU$3.5m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Angel Seafood Holdings is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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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