Would Affluent Foundation Holdings (HKG:1757) Be Better Off With Less Debt?

Warren Buffett famously said, '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 Affluent Foundation Holdings Limited (HKG:1757) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Affluent Foundation Holdings

What Is Affluent Foundation Holdings's Net Debt?

As you can see below, at the end of September 2023, Affluent Foundation Holdings had HK$40.5m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of HK$5.13m, its net debt is less, at about HK$35.3m.

A Look At Affluent Foundation Holdings' Liabilities

We can see from the most recent balance sheet that Affluent Foundation Holdings had liabilities of HK$93.7m falling due within a year, and liabilities of HK$33.1m due beyond that. On the other hand, it had cash of HK$5.13m and HK$115.9m worth of receivables due within a year. So it has liabilities totalling HK$5.77m more than its cash and near-term receivables, combined.

Since publicly traded Affluent Foundation Holdings shares are worth a total of HK$208.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In the last year Affluent Foundation Holdings had a loss before interest and tax, and actually shrunk its revenue by 25%, to HK$301m. That makes us nervous, to say the least.

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). To be specific the EBIT loss came in at HK$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$8.7m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Affluent Foundation Holdings has 1 warning sign we think 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.