Does Northern Star Resources (ASX:NST) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Northern Star Resources Limited (ASX:NST) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Northern Star Resources

How Much Debt Does Northern Star Resources Carry?

As you can see below, at the end of December 2024, Northern Star Resources had AU$949.5m of debt, up from AU$859.7m a year ago. Click the image for more detail. But it also has AU$1.05b in cash to offset that, meaning it has AU$96.4m net cash.

How Healthy Is Northern Star Resources' Balance Sheet?

We can see from the most recent balance sheet that Northern Star Resources had liabilities of AU$991.7m falling due within a year, and liabilities of AU$3.85b due beyond that. Offsetting these obligations, it had cash of AU$1.05b as well as receivables valued at AU$226.2m due within 12 months. So its liabilities total AU$3.57b more than the combination of its cash and short-term receivables.

Of course, Northern Star Resources has a titanic market capitalization of AU$19.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Northern Star Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Northern Star Resources grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Northern Star Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Northern Star Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Northern Star Resources produced sturdy free cash flow equating to 55% 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

Although Northern Star Resources's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$96.4m. And it impressed us with its EBIT growth of 29% over the last year. So is Northern Star Resources's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Northern Star Resources would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.