CSN Mineração (BVMF:CMIN3) Has A Rock Solid 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. As with many other companies CSN Mineração S.A. (BVMF:CMIN3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for CSN Mineração

What Is CSN Mineração's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 CSN Mineração had debt of R$8.90b, up from R$7.58b in one year. But it also has R$11.8b in cash to offset that, meaning it has R$2.89b net cash.

How Healthy Is CSN Mineração's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CSN Mineração had liabilities of R$5.17b due within 12 months and liabilities of R$13.9b due beyond that. On the other hand, it had cash of R$11.8b and R$1.10b worth of receivables due within a year. So it has liabilities totalling R$6.22b more than its cash and near-term receivables, combined.

Since publicly traded CSN Mineração shares are worth a total of R$33.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CSN Mineração boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, CSN Mineração grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. 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 CSN Mineração'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CSN Mineração 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, CSN Mineração generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While CSN Mineração does have more liabilities than liquid assets, it also has net cash of R$2.89b. And it impressed us with free cash flow of R$6.4b, being 82% of its EBIT. So is CSN Mineração's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example CSN Mineração has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.