Health Check: How Prudently Does AF Global (SGX:L38) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that AF Global Limited (SGX:L38) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AF Global

What Is AF Global's Net Debt?

As you can see below, at the end of December 2020, AF Global had S$24.6m of debt, up from S$8.11m a year ago. Click the image for more detail. But on the other hand it also has S$30.6m in cash, leading to a S$6.10m net cash position.

A Look At AF Global's Liabilities

The latest balance sheet data shows that AF Global had liabilities of S$18.4m due within a year, and liabilities of S$40.6m falling due after that. Offsetting this, it had S$30.6m in cash and S$823.0k in receivables that were due within 12 months. So its liabilities total S$27.5m more than the combination of its cash and short-term receivables.

AF Global has a market capitalization of S$89.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, AF Global boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AF Global 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.

In the last year AF Global had a loss before interest and tax, and actually shrunk its revenue by 62%, to S$11m. To be frank that doesn't bode well.

So How Risky Is AF Global?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months AF Global lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$8.8m of cash and made a loss of S$4.9m. But the saving grace is the S$6.10m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 3 warning signs for AF Global you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

If you decide to trade AF Global, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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.