Health Check: How Prudently Does Northern Dynasty Minerals (TSE:NDM) Use 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.' 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 Northern Dynasty Minerals Ltd. (TSE:NDM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Northern Dynasty Minerals

How Much Debt Does Northern Dynasty Minerals Carry?

As you can see below, at the end of March 2024, Northern Dynasty Minerals had CA$2.32m of debt, up from none a year ago. Click the image for more detail. However, it does have CA$15.2m in cash offsetting this, leading to net cash of CA$12.9m.

A Look At Northern Dynasty Minerals' Liabilities

According to the last reported balance sheet, Northern Dynasty Minerals had liabilities of CA$21.6m due within 12 months, and liabilities of CA$333.0k due beyond 12 months. Offsetting this, it had CA$15.2m in cash and CA$144.0k in receivables that were due within 12 months. So it has liabilities totalling CA$6.56m more than its cash and near-term receivables, combined.

Of course, Northern Dynasty Minerals has a market capitalization of CA$269.2m, 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 Dynasty Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Northern Dynasty Minerals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Northern Dynasty Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Northern Dynasty Minerals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Northern Dynasty Minerals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$21m of cash and made a loss of CA$19m. Given it only has net cash of CA$12.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 - Northern Dynasty Minerals has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com