Affluent Partners Holdings (HKG:1466) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Affluent Partners Holdings Limited (HKG:1466) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Partners Holdings

What Is Affluent Partners Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Affluent Partners Holdings had HK$30.0m of debt, an increase on HK$28.8m, over one year. On the flip side, it has HK$26.0m in cash leading to net debt of about HK$3.95m.

How Strong Is Affluent Partners Holdings' Balance Sheet?

We can see from the most recent balance sheet that Affluent Partners Holdings had liabilities of HK$45.2m falling due within a year, and liabilities of HK$167.0k due beyond that. Offsetting these obligations, it had cash of HK$26.0m as well as receivables valued at HK$33.4m due within 12 months. So it can boast HK$14.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Affluent Partners Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Affluent Partners 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, Affluent Partners Holdings made a loss at the EBIT level, and saw its revenue drop to HK$58m, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

Not only did Affluent Partners Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$12m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Affluent Partners Holdings has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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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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.