Health Check: How Prudently Does Apollo Future Mobility Group (HKG:860) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Apollo Future Mobility Group Limited (HKG:860) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Apollo Future Mobility Group

What Is Apollo Future Mobility Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Apollo Future Mobility Group had HK$68.9m of debt in March 2021, down from HK$127.9m, one year before. However, its balance sheet shows it holds HK$318.2m in cash, so it actually has HK$249.3m net cash.

How Healthy Is Apollo Future Mobility Group's Balance Sheet?

We can see from the most recent balance sheet that Apollo Future Mobility Group had liabilities of HK$958.8m falling due within a year, and liabilities of HK$851.7m due beyond that. On the other hand, it had cash of HK$318.2m and HK$700.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$791.5m.

While this might seem like a lot, it is not so bad since Apollo Future Mobility Group has a market capitalization of HK$3.83b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Apollo Future Mobility Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Apollo Future Mobility Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Apollo Future Mobility Group had a loss before interest and tax, and actually shrunk its revenue by 33%, to HK$342m. That makes us nervous, to say the least.

So How Risky Is Apollo Future Mobility Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Apollo Future Mobility Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$492m and booked a HK$344m accounting loss. Given it only has net cash of HK$249.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Apollo Future Mobility Group you should be aware of, and 2 of them are concerning.

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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