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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 Cohort plc (LON:CHRT) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Cohort
What Is Cohort's Debt?
As you can see below, Cohort had UK£29.3m of debt, at April 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds UK£40.4m in cash, so it actually has UK£11.0m net cash.
How Strong Is Cohort's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Cohort had liabilities of UK£96.0m due within 12 months and liabilities of UK£18.0m due beyond that. Offsetting this, it had UK£40.4m in cash and UK£48.5m in receivables that were due within 12 months. So it has liabilities totalling UK£25.1m more than its cash and near-term receivables, combined.
Of course, Cohort has a market capitalization of UK£210.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Cohort also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that Cohort grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cohort'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.