Does Bowen Coking Coal (ASX:BCB) Have A Healthy Balance Sheet?

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.' 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. We can see that Bowen Coking Coal Limited (ASX:BCB) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bowen Coking Coal

What Is Bowen Coking Coal's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Bowen Coking Coal had debt of AU$41.3m, up from none in one year. However, its balance sheet shows it holds AU$72.5m in cash, so it actually has AU$31.2m net cash.

How Healthy Is Bowen Coking Coal's Balance Sheet?

The latest balance sheet data shows that Bowen Coking Coal had liabilities of AU$40.8m due within a year, and liabilities of AU$48.5m falling due after that. Offsetting these obligations, it had cash of AU$72.5m as well as receivables valued at AU$15.1m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Bowen Coking Coal's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$588.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Bowen Coking Coal 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 it is future earnings, more than anything, that will determine Bowen Coking Coal's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least Bowen Coking Coal booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Bowen Coking Coal?

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 Bowen Coking Coal had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$34m and booked a AU$18m accounting loss. With only AU$31.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Bowen Coking Coal is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.