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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. As with many other companies AF Global Limited (SGX:L38) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for AF Global
What Is AF Global's Net Debt?
You can click the graphic below for the historical numbers, but it shows that AF Global had S$25.8m of debt in June 2019, down from S$81.4m, one year before. But it also has S$34.9m in cash to offset that, meaning it has S$9.11m net cash.
How Strong Is AF Global's Balance Sheet?
We can see from the most recent balance sheet that AF Global had liabilities of S$34.0m falling due within a year, and liabilities of S$29.0m due beyond that. On the other hand, it had cash of S$34.9m and S$855.0k worth of receivables due within a year. So it has liabilities totalling S$27.3m more than its cash and near-term receivables, combined.
Since publicly traded AF Global shares are worth a total of S$148.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 it is AF Global's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.