Does Cobalt Blue Holdings (ASX:COB) 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 note that Cobalt Blue Holdings Limited (ASX:COB) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does Cobalt Blue Holdings Carry?

As you can see below, at the end of December 2023, Cobalt Blue Holdings had AU$2.89m of debt, up from AU$2.51m a year ago. Click the image for more detail. But on the other hand it also has AU$5.27m in cash, leading to a AU$2.38m net cash position.

How Strong Is Cobalt Blue Holdings' Balance Sheet?

The latest balance sheet data shows that Cobalt Blue Holdings had liabilities of AU$3.98m due within a year, and liabilities of AU$3.22m falling due after that. Offsetting this, it had AU$5.27m in cash and AU$4.41m in receivables that were due within 12 months. So it actually has AU$2.48m 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. Simply put, the fact that Cobalt Blue Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Cobalt Blue Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$28m of cash and made a loss of AU$5.9m. With only AU$2.38m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Cobalt Blue Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Cobalt Blue Holdings has 6 warning signs (and 3 which don't sit too well with us) we think you should know about.

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. 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.