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Would Affluent Foundation Holdings (HKG:1757) Might Be Better Off With Less Debt

Simply Wall St

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Affluent Foundation Holdings Limited (HKG:1757) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Affluent Foundation Holdings

What Is Affluent Foundation Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2019 Affluent Foundation Holdings had debt of HK$33.6m, up from HK$28.7m in one year. However, it does have HK$23.8m in cash offsetting this, leading to net debt of about HK$9.84m.

SEHK:1757 Historical Debt, August 1st 2019

How Strong Is Affluent Foundation Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Affluent Foundation Holdings had liabilities of HK$86.5m due within 12 months and liabilities of HK$6.00m due beyond that. Offsetting this, it had HK$23.8m in cash and HK$147.2m in receivables that were due within 12 months. So it can boast HK$78.5m more liquid assets than total liabilities.

This luscious liquidity implies that Affluent Foundation Holdings's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Affluent Foundation Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Affluent Foundation Holdings reported revenue of HK$400m, which is a gain of 8.9%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Affluent Foundation Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$73m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Affluent Foundation Holdings's profit, revenue, and operating cashflow have changed over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.