Is Cobalt Blue Holdings (ASX:COB) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cobalt Blue Holdings Limited (ASX:COB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Cobalt Blue Holdings

How Much Debt Does Cobalt Blue Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Cobalt Blue Holdings had AU$2.51m of debt, an increase on AU$2.18m, over one year. But on the other hand it also has AU$21.8m in cash, leading to a AU$19.3m net cash position.

How Strong Is Cobalt Blue Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cobalt Blue Holdings had liabilities of AU$4.80m due within 12 months and liabilities of AU$3.04m due beyond that. On the other hand, it had cash of AU$21.8m and AU$105.0k worth of receivables due within a year. So it can boast AU$14.0m more liquid assets than total liabilities.

This surplus suggests that Cobalt Blue Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cobalt Blue Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, investors are probably hoping that Cobalt Blue Holdings finds some valuable resources, before it runs out of money.

So How Risky Is Cobalt Blue Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Cobalt Blue Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$25m and booked a AU$6.3m accounting loss. With only AU$19.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Cobalt Blue Holdings has 6 warning signs (and 1 which is significant) 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.