Health Check: How Prudently Does Comet Ridge (ASX:COI) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Comet Ridge Limited (ASX:COI) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does Comet Ridge Carry?

As you can see below, Comet Ridge had AU$6.66m of debt at June 2025, down from AU$7.37m a year prior. But it also has AU$13.3m in cash to offset that, meaning it has AU$6.64m net cash.

How Strong Is Comet Ridge's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Comet Ridge had liabilities of AU$34.8m due within 12 months and liabilities of AU$9.89m due beyond that. On the other hand, it had cash of AU$13.3m and AU$975.0k worth of receivables due within a year. So it has liabilities totalling AU$30.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Comet Ridge is worth AU$137.6m, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Comet Ridge also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Comet Ridge can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for Comet Ridge

Given its lack of meaningful operating revenue, Comet Ridge shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is Comet Ridge?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Comet Ridge had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$18m of cash and made a loss of AU$3.6m. Given it only has net cash of AU$6.64m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Comet Ridge (2 are potentially serious!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.