Is Northern Star Resources (ASX:NST) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Northern Star Resources

What Is Northern Star Resources's Net Debt?

As you can see below, at the end of December 2023, Northern Star Resources had AU$859.7m of debt, up from AU$348.0m a year ago. Click the image for more detail. However, it does have AU$939.1m in cash offsetting this, leading to net cash of AU$79.4m.

How Healthy Is Northern Star Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Northern Star Resources had liabilities of AU$651.3m due within 12 months and liabilities of AU$3.28b due beyond that. On the other hand, it had cash of AU$939.1m and AU$194.5m worth of receivables due within a year. So its liabilities total AU$2.79b more than the combination of its cash and short-term receivables.

Of course, Northern Star Resources has a titanic market capitalization of AU$15.7b, 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.

Even more impressive was the fact that Northern Star Resources grew its EBIT by 342% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Northern Star Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Northern Star Resources 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 two years, Northern Star Resources produced sturdy free cash flow equating to 64% 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$79.4m. And it impressed us with its EBIT growth of 342% over the last year. So we don't think Northern Star Resources's use of debt is risky. We'd be very excited to see if Northern Star Resources insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.