AMOS Group (SGX:RF7) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies AMOS Group Limited (SGX:RF7) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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.

View our latest analysis for AMOS Group

How Much Debt Does AMOS Group Carry?

As you can see below, AMOS Group had S$33.9m of debt at September 2020, down from S$40.3m a year prior. However, because it has a cash reserve of S$12.8m, its net debt is less, at about S$21.1m.

How Strong Is AMOS Group's Balance Sheet?

According to the last reported balance sheet, AMOS Group had liabilities of S$45.8m due within 12 months, and liabilities of S$28.9m due beyond 12 months. Offsetting these obligations, it had cash of S$12.8m as well as receivables valued at S$32.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$29.1m.

AMOS Group has a market capitalization of S$51.9m, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AMOS Group 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.

Over 12 months, AMOS Group made a loss at the EBIT level, and saw its revenue drop to S$119m, which is a fall of 9.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months AMOS Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable S$14m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through S$9.3m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for AMOS Group (2 can't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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