Is AF Global (SGX:L38) A Risky Investment?

Warren Buffett famously said, '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 AF Global Limited (SGX:L38) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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

What Is AF Global's Debt?

The chart below, which you can click on for greater detail, shows that AF Global had S$21.7m in debt in June 2024; about the same as the year before. But on the other hand it also has S$35.5m in cash, leading to a S$13.8m net cash position.

How Healthy Is AF Global's Balance Sheet?

The latest balance sheet data shows that AF Global had liabilities of S$21.5m due within a year, and liabilities of S$33.0m falling due after that. On the other hand, it had cash of S$35.5m and S$642.0k worth of receivables due within a year. So its liabilities total S$18.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because AF Global is worth S$75.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, AF Global also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that AF Global grew its EBIT by 107% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is AF Global'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. AF Global may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, AF Global actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although AF Global's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$13.8m. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in S$6.9m. So is AF Global's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with AF Global , and understanding them should be part of your investment process.

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.