Does Cobalt Blue Holdings (ASX:COB) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Cobalt Blue Holdings Limited (ASX:COB) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cobalt Blue Holdings

What Is Cobalt Blue Holdings's Net Debt?

As you can see below, at the end of December 2020, Cobalt Blue Holdings had AU$2.81m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$7.06m in cash offsetting this, leading to net cash of AU$4.25m.

A Look At Cobalt Blue Holdings' Liabilities

According to the last reported balance sheet, Cobalt Blue Holdings had liabilities of AU$1.94m due within 12 months, and liabilities of AU$2.33m due beyond 12 months. Offsetting these obligations, it had cash of AU$7.06m as well as receivables valued at AU$69.0k due within 12 months. So it can boast AU$2.86m more liquid assets than total liabilities.

This short term liquidity is a sign that Cobalt Blue Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cobalt Blue Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cobalt Blue 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.

Since Cobalt Blue Holdings has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Cobalt Blue Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cobalt Blue Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$4.5m of cash and made a loss of AU$2.4m. With only AU$4.25m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Cobalt Blue Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Cobalt Blue Holdings (4 can't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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. 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.
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