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.' 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. Importantly, AF Global Limited (SGX:L38) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for AF Global

How Much Debt Does AF Global Carry?

You can click the graphic below for the historical numbers, but it shows that AF Global had S$25.5m of debt in June 2022, down from S$26.6m, one year before. But on the other hand it also has S$26.8m in cash, leading to a S$1.36m net cash position.

A Look At AF Global's Liabilities

According to the last reported balance sheet, AF Global had liabilities of S$19.4m due within 12 months, and liabilities of S$37.5m due beyond 12 months. Offsetting these obligations, it had cash of S$26.8m as well as receivables valued at S$796.0k due within 12 months. So it has liabilities totalling S$29.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because AF Global is worth S$92.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, AF Global boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, AF Global reported revenue of S$9.3m, which is a gain of 104%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is AF Global?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year AF Global had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of S$2.2m and booked a S$3.4m accounting loss. But the saving grace is the S$1.36m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that AF Global has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 instance, we've identified 3 warning signs for AF Global (2 are a bit unpleasant) you should be aware of.

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.