Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Affluent Partners Holdings Limited (HKG:1466) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Affluent Partners Holdings's Debt?
The image below, which you can click on for greater detail, shows that Affluent Partners Holdings had debt of HK$28.0m at the end of September 2020, a reduction from HK$76.8m over a year. However, it does have HK$14.0m in cash offsetting this, leading to net debt of about HK$14.0m.
A Look At Affluent Partners Holdings's Liabilities
The latest balance sheet data shows that Affluent Partners Holdings had liabilities of HK$47.7m due within a year, and liabilities of HK$1.02m falling due after that. On the other hand, it had cash of HK$14.0m and HK$47.8m worth of receivables due within a year. So it actually has HK$13.0m more liquid assets than total liabilities.
This luscious liquidity implies that Affluent Partners Holdings's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. There's no doubt that we learn most about debt from the balance sheet. But it is Affluent Partners 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 Partners Holdings had a loss before interest and tax, and actually shrunk its revenue by 55%, to HK$65m. That makes us nervous, to say the least.
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). Its EBIT loss was a whopping HK$62m. 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 want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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 Partners Holdings you should be aware of, and 2 of them are significant.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. 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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