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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that First Cobalt Corp. (CVE:FCC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does First Cobalt Carry?
The image below, which you can click on for greater detail, shows that at September 2021 First Cobalt had debt of CA$22.4m, up from CA$6.98m in one year. However, it does have CA$63.4m in cash offsetting this, leading to net cash of CA$41.0m.
A Look At First Cobalt's Liabilities
According to the last reported balance sheet, First Cobalt had liabilities of CA$2.11m due within 12 months, and liabilities of CA$51.7m due beyond 12 months. On the other hand, it had cash of CA$63.4m and CA$1.10m worth of receivables due within a year. So it can boast CA$10.7m more liquid assets than total liabilities.
This surplus suggests that First Cobalt has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that First Cobalt 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 it is future earnings, more than anything, that will determine First Cobalt's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Since First Cobalt has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is First Cobalt?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year First Cobalt had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$14m of cash and made a loss of CA$17m. Given it only has net cash of CA$41.0m, the company may need to raise more capital if it doesn't reach break-even 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for First Cobalt (of which 1 can't be ignored!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.