Cobham: MQ-1 Predator. Cobham supplies equipment to the Predator UAV which is currently in use in Afghanistan and Iraq

If Cobham was an aircraft, it certainly would not be a stealth fighter. After its fifth profit warning in little more than a year, and a hefty writedown, the UK components maker is a substantial blip on the radar of City bears. It needs to find a flight path that attracts less flak.

Real losses last year and predicted ones this year are putting pressure on an already weakened balance sheet. On Thursday, the aerospace specialist dealt with the asset side. As of June, almost half of Cobham’s assets came in the optimistic form of intangibles. These represent non-physical resources such as patents and brand names. Goodwill, the premium paid for assets above book value, is another intangible, racked up after years of acquisitions. This week’s £574m impairment — over a fifth of its market value — begins the process of deflating Cobham’s assets to a more sensible level.

Cobham’s obvious next step is to shrink its liabilities, much of which are US dollar denominated. These cannot be so easily reduced via a stroke of the pen. Net debt exceeds equity by some way, and is three-times earnings before interest, tax, depreciation and amortisation.

The good news is that the writedowns — not to mention another £179m in charges against future contracts plus £58m in sundries — will not hurt Cobham’s cash flow. No creditors will start circling, worried about their money. Nor is Cobham alone; peer Meggitt also has lots of intangibles and heavy debt.

Still, the actions taken so far are not enough. Cobham has already raised fresh funds in a rights issue, so it cannot easily go back to shareholders. New chief executive David Lockwood will need to jettison assets quickly to start clearing that debt load. His challenge is to do so without the loss of too much operating earnings — and without resorting to a fire sale.

Cobham shares have fallen 45 per cent in a year, but still trade well above book value. That suggests the market believes the business can avoid a crash landing. But best to let the stock settle before backing that proposition.

Email the Lex team at lex@ft.com

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