Is Afarak Group Oyj (HEL:AFAGR) Using Debt Sensibly?

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.' 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. We can see that Afarak Group Oyj (HEL:AFAGR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Afarak Group Oyj

How Much Debt Does Afarak Group Oyj Carry?

As you can see below, Afarak Group Oyj had €48.6m of debt at December 2020, down from €59.8m a year prior. However, it also had €1.10m in cash, and so its net debt is €47.5m.

How Strong Is Afarak Group Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Afarak Group Oyj had liabilities of €32.0m due within 12 months and liabilities of €85.6m due beyond that. Offsetting these obligations, it had cash of €1.10m as well as receivables valued at €15.7m due within 12 months. So it has liabilities totalling €100.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €52.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Afarak Group Oyj would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Afarak Group Oyj's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Afarak Group Oyj made a loss at the EBIT level, and saw its revenue drop to €60m, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Afarak Group Oyj's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €6.7m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €5.4m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Afarak Group Oyj (including 2 which don't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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