Is Cobalt Blue Holdings (ASX:COB) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Cobalt Blue Holdings Limited (ASX:COB) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Cobalt Blue Holdings

What Is Cobalt Blue Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Cobalt Blue Holdings had AU$2.70m of debt, an increase on AU$2.34m, over one year. But on the other hand it also has AU$15.6m in cash, leading to a AU$12.9m 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$7.26m due within a year, and liabilities of AU$3.17m falling due after that. Offsetting these obligations, it had cash of AU$15.6m as well as receivables valued at AU$3.12m due within 12 months. So it can boast AU$8.30m 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. Succinctly put, Cobalt Blue Holdings 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 Cobalt Blue Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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?

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 Cobalt Blue Holdings 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$29m and booked a AU$5.5m accounting loss. With only AU$12.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. To that end, you should learn about the 6 warning signs we've spotted with Cobalt Blue Holdings (including 2 which can't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.