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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.' 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 Cake Box Holdings Plc (LON:CBOX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Cake Box Holdings
How Much Debt Does Cake Box Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Cake Box Holdings had UK£1.61m of debt in March 2020, down from UK£2.15m, one year before. But on the other hand it also has UK£3.68m in cash, leading to a UK£2.06m net cash position.
How Healthy Is Cake Box Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Cake Box Holdings had liabilities of UK£2.31m due within 12 months and liabilities of UK£1.98m due beyond that. Offsetting this, it had UK£3.68m in cash and UK£1.45m in receivables that were due within 12 months. So it actually has UK£840.9k more liquid assets than total liabilities.
This state of affairs indicates that Cake Box Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£65.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cake Box Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Cake Box Holdings saw its EBIT decline by 5.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 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.