Rock star Growth Puts Affluent Foundation Holdings (HKG:1757) In A Position To Use Debt

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 can see that Affluent Foundation Holdings Limited (HKG:1757) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Affluent Foundation Holdings

What Is Affluent Foundation Holdings's Net Debt?

As you can see below, Affluent Foundation Holdings had HK$34.7m of debt at March 2021, down from HK$40.5m a year prior. However, it does have HK$8.53m in cash offsetting this, leading to net debt of about HK$26.2m.

How Strong Is Affluent Foundation Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Affluent Foundation Holdings had liabilities of HK$119.4m due within 12 months and liabilities of HK$4.73m due beyond that. On the other hand, it had cash of HK$8.53m and HK$144.5m worth of receivables due within a year. So it can boast HK$28.9m more liquid assets than total liabilities.

This surplus suggests that Affluent Foundation Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Affluent Foundation 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.

In the last year Affluent Foundation Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 110%, to HK$447m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Affluent Foundation 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 HK$2.3m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. Having said that the rate of revenue growth will likely impress the market, greatly facilitating any potential capital raising, if required. Despite that strong positive, this one could still be considered a bit too risky, by some. 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. Case in point: We've spotted 4 warning signs for Affluent Foundation Holdings you should be aware of, and 1 of them is concerning.

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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