Is Nickel Mines (ASX:NIC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Nickel Mines Limited (ASX:NIC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nickel Mines

How Much Debt Does Nickel Mines Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Nickel Mines had debt of US$173.9m, up from US$65.0m in one year. But it also has US$189.8m in cash to offset that, meaning it has US$15.9m net cash.

How Strong Is Nickel Mines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nickel Mines had liabilities of US$39.0m due within 12 months and liabilities of US$229.9m due beyond that. On the other hand, it had cash of US$189.8m and US$120.6m worth of receivables due within a year. So it can boast US$41.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Nickel Mines could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nickel Mines boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Nickel Mines grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nickel Mines can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nickel Mines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Nickel Mines produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Nickel Mines has US$15.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 23% over the last year. So we don't think Nickel Mines's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Nickel Mines you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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