Does Bowen Coking Coal (ASX:BCB) have a healthy balance sheet?
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Bowen Coking Coal Limited (ASX:BCB) uses debt in its business. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
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What is Bowen Coking Coal’s debt?
The image below, which you can click on for more details, shows that in June 2022, Bowen Coking Coal had A$41.3 million in debt, up from none in a year. However, his balance sheet shows that he holds A$72.5 million in cash, so he actually has a net cash position of A$31.2 million.
How healthy is Bowen Coking Coal’s balance sheet?
The latest balance sheet data shows that Bowen Coking Coal had liabilities of A$40.8 million due within a year, and liabilities of A$48.5 million falling due thereafter. As compensation for these obligations, it had cash of A$72.5 million and receivables valued at A$15.1 million due within 12 months. Thus, its total liabilities match its short-term liquid assets almost perfectly.
This indicates that Bowen Coking Coal’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So while it’s hard to imagine the A$588.1 million company fighting for cash, we still think it’s worth keeping an eye on its balance sheet. Despite its notable liabilities, Bowen Coking Coal has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Bowen Coking Coal’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Although it did not make a profit, at least Bowen Coking Coal recorded its first earnings as a publicly traded company, in the last twelve months.
So how risky is Bowen’s coking coal?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And over the past year, Bowen Coking Coal has posted a loss in earnings before interest and taxes (EBIT), if truth be told. And over the same period, it had a negative free cash outflow of A$34 million and recorded a book loss of A$18 million. With just A$31.2 million on the balance sheet, it looks like it will soon have to raise capital again. In summary, we are a little skeptical of this one, as it looks quite risky in the absence of free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Be aware that Bowen Coking Coal displays 2 warning signs in our investment analysis you should know…
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.