We Think Affluent Foundation Holdings (HKG:1757) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Affluent Foundation Holdings Limited (HKG:1757) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Affluent Foundation Holdings

How Much Debt Does Affluent Foundation Holdings Carry?

As you can see below, Affluent Foundation Holdings had HK$33.3m of debt at September 2024, down from HK$40.5m a year prior. However, it also had HK$8.04m in cash, and so its net debt is HK$25.3m.

A Look At Affluent Foundation Holdings' Liabilities

The latest balance sheet data shows that Affluent Foundation Holdings had liabilities of HK$114.6m due within a year, and liabilities of HK$34.6m falling due after that. Offsetting this, it had HK$8.04m in cash and HK$133.5m in receivables that were due within 12 months. So it has liabilities totalling HK$7.64m more than its cash and near-term receivables, combined.

Given Affluent Foundation Holdings has a market capitalization of HK$170.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Affluent Foundation Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Affluent Foundation Holdings made a loss at the EBIT level, and saw its revenue drop to HK$196m, which is a fall of 35%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Affluent Foundation Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$13m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$8.9m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Affluent Foundation Holdings has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.