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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that AMOS Group Limited (SGX:RF7) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for AMOS Group
How Much Debt Does AMOS Group Carry?
The image below, which you can click on for greater detail, shows that AMOS Group had debt of S$47.1m at the end of June 2019, a reduction from S$49.9m over a year. On the flip side, it has S$18.0m in cash leading to net debt of about S$29.1m.
How Strong Is AMOS Group's Balance Sheet?
We can see from the most recent balance sheet that AMOS Group had liabilities of S$51.6m falling due within a year, and liabilities of S$42.1m due beyond that. Offsetting this, it had S$18.0m in cash and S$45.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$30.6m.
This deficit isn't so bad because AMOS Group is worth S$59.7m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is AMOS Group'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.
In the last year AMOS Group wasn't profitable at an EBIT level, but managed to grow its revenue by54%, to S$131m. With any luck the company will be able to grow its way to profitability.