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 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 Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider 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£1.52m of debt in September 2020, down from UK£1.67m, one year before. But it also has UK£5.34m in cash to offset that, meaning it has UK£3.82m net cash.

A Look At Cake Box Holdings' Liabilities

We can see from the most recent balance sheet that Cake Box Holdings had liabilities of UK£3.90m falling due within a year, and liabilities of UK£1.90m due beyond that. Offsetting these obligations, it had cash of UK£5.34m as well as receivables valued at UK£1.60m due within 12 months. So it can boast UK£1.13m 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 while it's hard to imagine that the UK£94.8m 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!

While Cake Box Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cake Box Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.