Is Northern Dynasty Minerals (TSE:NDM) Using Debt Sensibly?

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 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. As with many other companies Northern Dynasty Minerals Ltd. (TSE:NDM) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Northern Dynasty Minerals

What Is Northern Dynasty Minerals's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Northern Dynasty Minerals had debt of CA$2.20m, up from none in one year. However, its balance sheet shows it holds CA$18.2m in cash, so it actually has CA$16.0m net cash.

A Look At Northern Dynasty Minerals' Liabilities

The latest balance sheet data shows that Northern Dynasty Minerals had liabilities of CA$20.2m due within a year, and liabilities of CA$338.0k falling due after that. Offsetting these obligations, it had cash of CA$18.2m as well as receivables valued at CA$675.0k due within 12 months. So its liabilities total CA$1.69m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Northern Dynasty Minerals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$234.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Northern Dynasty Minerals boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Dynasty Minerals'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.

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?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Northern Dynasty Minerals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$22m and booked a CA$21m accounting loss. With only CA$16.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Northern Dynasty Minerals , and understanding them should be part of your investment process.

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.

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

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.