Cake Box Holdings (LON:CBOX) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Cake Box Holdings Plc (LON:CBOX) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cake Box Holdings

What Is Cake Box Holdings's Debt?

The image below, which you can click on for greater detail, shows that Cake Box Holdings had debt of UK£1.19m at the end of September 2023, a reduction from UK£1.27m over a year. However, its balance sheet shows it holds UK£7.50m in cash, so it actually has UK£6.31m net cash.

How Healthy Is Cake Box Holdings' Balance Sheet?

The latest balance sheet data shows that Cake Box Holdings had liabilities of UK£4.13m due within a year, and liabilities of UK£5.23m falling due after that. On the other hand, it had cash of UK£7.50m and UK£2.19m worth of receivables due within a year. So it actually has UK£328.8k more liquid assets than total liabilities.

Having regard to Cake Box Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£66.0m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Cake Box Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Cake Box Holdings has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cake Box 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cake Box Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Cake Box Holdings produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cake Box Holdings has net cash of UK£6.31m, as well as more liquid assets than liabilities. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in UK£5.4m. So is Cake Box Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Cake Box Holdings is showing 2 warning signs in our investment analysis , 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.