Is Northern Dynasty Minerals (TSE:NDM) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Northern Dynasty Minerals Ltd. (TSE:NDM) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

What Is Northern Dynasty Minerals's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Northern Dynasty Minerals had debt of CA$2.75m, up from CA$2.20m in one year. But on the other hand it also has CA$16.1m in cash, leading to a CA$13.4m net cash position.

How Healthy Is Northern Dynasty Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Northern Dynasty Minerals had liabilities of CA$39.4m due within 12 months and liabilities of CA$548.0k due beyond that. Offsetting this, it had CA$16.1m in cash and CA$152.0k in receivables that were due within 12 months. So it has liabilities totalling CA$23.7m more than its cash and near-term receivables, combined.

Of course, Northern Dynasty Minerals has a market capitalization of CA$689.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

See our latest analysis for Northern Dynasty Minerals

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

So How Risky Is Northern Dynasty Minerals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$17m and booked a CA$36m accounting loss. Given it only has net cash of CA$13.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Northern Dynasty Minerals (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.