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

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

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Northern Dynasty Minerals

What Is Northern Dynasty Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Northern Dynasty Minerals had debt of CA$2.49m, up from none in one year. But it also has CA$21.8m in cash to offset that, meaning it has CA$19.3m net cash.

A Look At Northern Dynasty Minerals' Liabilities

The latest balance sheet data shows that Northern Dynasty Minerals had liabilities of CA$21.4m due within a year, and liabilities of CA$522.0k falling due after that. On the other hand, it had cash of CA$21.8m and CA$182.0k worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Northern Dynasty Minerals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$365.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Northern Dynasty Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Northern Dynasty Minerals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$20m and booked a CA$17m accounting loss. But at least it has CA$19.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Northern Dynasty Minerals you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.