Northern Star Resources (ASX:NST) Has A Pretty Healthy Balance Sheet

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 Northern Star Resources Limited (ASX:NST) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Northern Star Resources's Net Debt?

As you can see below, Northern Star Resources had AU$97.5m of debt at June 2022, down from AU$658.3m a year prior. But it also has AU$571.1m in cash to offset that, meaning it has AU$473.6m net cash.

A Look At Northern Star Resources' Liabilities

According to the last reported balance sheet, Northern Star Resources had liabilities of AU$776.3m due within 12 months, and liabilities of AU$2.14b due beyond 12 months. On the other hand, it had cash of AU$571.1m and AU$134.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$2.21b.

Northern Star Resources has a market capitalization of AU$9.43b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Northern Star Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Northern Star Resources made a loss at the EBIT level, last year, it was also good to see that it generated AU$336m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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. Happily for any shareholders, Northern Star Resources actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Northern Star Resources does have more liabilities than liquid assets, it also has net cash of AU$473.6m. The cherry on top was that in converted 170% of that EBIT to free cash flow, bringing in AU$571m. So is Northern Star Resources's debt a risk? It doesn't seem so to us. 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. Be aware that Northern Star Resources is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.