Affluent Partners Holdings (HKG:1466) Is Making Moderate Use 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Affluent Partners Holdings Limited (HKG:1466) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Affluent Partners Holdings

How Much Debt Does Affluent Partners Holdings Carry?

The image below, which you can click on for greater detail, shows that Affluent Partners Holdings had debt of HK$30.3m at the end of March 2021, a reduction from HK$31.9m over a year. However, because it has a cash reserve of HK$25.0m, its net debt is less, at about HK$5.38m.

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$45.5m falling due within a year, and liabilities of HK$288.0k due beyond that. Offsetting these obligations, it had cash of HK$25.0m as well as receivables valued at HK$39.2m due within 12 months. So it can boast HK$18.3m more liquid assets than total liabilities.

This luscious liquidity implies that Affluent Partners Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Affluent Partners Holdings will need earnings to service that debt. 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 Partners Holdings made a loss at the EBIT level, and saw its revenue drop to HK$43m, which is a fall of 61%. To be frank that doesn't bode well.

Caveat Emptor

While Affluent Partners Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$42m. 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. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Affluent Partners Holdings is showing 4 warning signs in our investment analysis , and 3 of those are potentially serious...

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.

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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.
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