Is CSN Mineração (BVMF:CMIN3) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that CSN Mineração S.A. (BVMF:CMIN3) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for CSN Mineração

What Is CSN Mineração's Debt?

The chart below, which you can click on for greater detail, shows that CSN Mineração had R$8.74b in debt in September 2024; about the same as the year before. But on the other hand it also has R$14.5b in cash, leading to a R$5.75b net cash position.

How Healthy Is CSN Mineração's Balance Sheet?

We can see from the most recent balance sheet that CSN Mineração had liabilities of R$9.32b falling due within a year, and liabilities of R$16.2b due beyond that. Offsetting this, it had R$14.5b in cash and R$1.13b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$9.90b.

While this might seem like a lot, it is not so bad since CSN Mineração has a market capitalization of R$30.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, CSN Mineração boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that CSN Mineração has increased its EBIT by 2.1% over twelve months, which should ease any concerns about debt repayment. 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 CSN Mineração 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. 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. Over the most recent three years, CSN Mineração recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although CSN Mineração's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$5.75b. And it impressed us with free cash flow of R$7.3b, being 76% of its EBIT. So we are not troubled with CSN Mineração's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for CSN Mineração you should be aware of, and 1 of them is a bit unpleasant.

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.