Is Cobalt Blue Holdings (ASX: COB) risky using debt?
David Iben put it right when he said: âVolatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Cobalt Blue Holdings Limited (ASX: COB) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Cobalt Blue Holdings
What is the debt of Cobalt Blue Holdings?
You can click on the graph below for historical numbers, but it shows that as of December 2020, Cobalt Blue Holdings had A $ 2.81 million in debt, an increase of none, year over year. However, his balance sheet shows that he has A $ 7.06 million in cash, so he actually has net cash of A $ 4.25 million.
How strong is Cobalt Blue Holdings’ balance sheet?
The latest balance sheet data shows Cobalt Blue Holdings had A $ 1.94 million liabilities due within one year, and A $ 2.33 million liabilities due thereafter. On the other hand, he had A $ 7.06 million in cash and A $ 69,000 in receivables due within one year. He can therefore boast of having A $ 2.86 million in liquid assets more than total Liabilities.
This surplus suggests that Cobalt Blue Holdings has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that Cobalt Blue Holdings has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is Cobalt Blue Holdings’ earnings that will influence balance sheet performance going forward. So if you want to know more about his earnings, it might be worth checking out this chart of his long term profit trend.
Given that Cobalt Blue Holdings does not have significant operating income, shareholders are likely hoping it will develop a valuable new mine before too long.
So what is the risk of Cobalt Blue Holdings?
Statistically speaking, businesses that lose money are riskier than those that make money. And over the past year, Cobalt Blue Holdings has recorded a loss before interest and taxes (EBIT), frankly. Indeed, during this period, he burned A $ 4.5 million in cash and made a loss of A $ 2.4 million. With only A $ 4.25 million in net cash, the company may need to raise more capital if it does not hit breakeven soon. The good news for shareholders is that Cobalt Blue Holdings is having tremendous revenue growth, so there is a very good chance that it will be able to increase its free cash flow in the years to come. While unprofitable businesses can be risky, they can also grow quickly and hard during those years before profit. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Be aware that Cobalt Blue Holdings displays 6 warning signs in our investment analysis , and 4 of them are not very good with us …
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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