We Think Northcliff Resources (TSE:NCF) Has A Fair Chunk Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Northcliff Resources Ltd. (TSE:NCF) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Northcliff Resources

What Is Northcliff Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2023 Northcliff Resources had debt of CA$5.31m, up from CA$1.88m in one year. However, it does have CA$4.48m in cash offsetting this, leading to net debt of about CA$832.7k.

How Healthy Is Northcliff Resources' Balance Sheet?

According to the balance sheet data, Northcliff Resources had liabilities of CA$6.39m due within 12 months, but no longer term liabilities. Offsetting this, it had CA$4.48m in cash and CA$43.7k in receivables that were due within 12 months. So it has liabilities totalling CA$1.87m more than its cash and near-term receivables, combined.

Since publicly traded Northcliff Resources shares are worth a total of CA$10.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Northcliff Resources will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, investors are probably hoping that Northcliff Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Northcliff Resources had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$1.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$2.4m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Northcliff Resources you should be aware of, and 4 of them are potentially serious.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.