Is Comet Ridge (ASX:COI) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Comet Ridge's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Comet Ridge had debt of AU$8.50m, up from AU$7.45m in one year. But on the other hand it also has AU$19.3m in cash, leading to a AU$10.8m net cash position.

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$41.7m due within 12 months and liabilities of AU$4.59m due beyond that. Offsetting this, it had AU$19.3m in cash and AU$286.0k in receivables that were due within 12 months. So its liabilities total AU$26.7m more than the combination of its cash and short-term receivables.

Given Comet Ridge has a market capitalization of AU$167.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Comet Ridge boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

View our latest analysis for Comet Ridge

Since Comet Ridge doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

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 the fact is that over the last twelve months Comet Ridge lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$17m and booked a AU$2.6m accounting loss. However, it has net cash of AU$10.8m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Comet Ridge has 2 warning signs we think you should be aware of.

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.