Is Cokal (ASX: CKA) a risky investment?
Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Cokal Limited (ASX: CKA) uses debt in his business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Cokal
How much debt does Cokal have?
You can click on the graph below for the historical numbers, but it shows that as of June 2021, Cokal had a debt of $ 3.86 million, an increase from $ 2.08 million, on a year. On the other hand, he has US $ 169.5,000 in cash, resulting in net debt of around US $ 3.69 million.
How strong is Cokal’s balance sheet?
We can see from the most recent balance sheet that Cokal had liabilities of US $ 19.9 million due within one year, and liabilities of US $ 38.0,000 due beyond. On the other hand, he had cash of US $ 169.5K and US $ 10.1K in receivables due within one year. Its liabilities therefore total US $ 19.7 million more than the combination of its cash and short-term receivables.
Considering that Cokal has a market cap of US $ 113.0 million, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Cokal will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Given its lack of significant operating income, investors are likely to hope that Cokal finds valuable resources, before running out of money.
Not only has Cokal’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, it lost US $ 2.6 million in EBIT. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that US $ 2.2 million of negative free cash flow has been bled in the past twelve months. Suffice it to say that we consider the action risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Cokal (2 are a bit of a concern) you should be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.