Is AF Global (SGX:L38) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for AF Global

How Much Debt Does AF Global Carry?

As you can see below, AF Global had S$25.3m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have S$27.4m in cash offsetting this, leading to net cash of S$2.16m.

How Strong Is AF Global's Balance Sheet?

The latest balance sheet data shows that AF Global had liabilities of S$18.0m due within a year, and liabilities of S$39.3m falling due after that. Offsetting these obligations, it had cash of S$27.4m as well as receivables valued at S$802.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$29.0m.

AF Global has a market capitalization of S$106.6m, so it could very likely raise cash to ameliorate 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. 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. 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 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 AF Global had a loss before interest and tax, and actually shrunk its revenue by 50%, to S$5.4m. To be frank that doesn't bode well.

So How Risky Is AF Global?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$5.6m of cash and made a loss of S$5.8m. But the saving grace is the S$2.16m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for AF Global (of which 1 shouldn't be ignored!) you should know about.

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.

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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.