Is Northern Vertex Mining (CVE:NEE) A Risky Investment?

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.' 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 can see that Northern Vertex Mining Corp. (CVE:NEE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Northern Vertex Mining

What Is Northern Vertex Mining's Net Debt?

The image below, which you can click on for greater detail, shows that Northern Vertex Mining had debt of US$5.90m at the end of December 2020, a reduction from US$14.6m over a year. But it also has US$8.29m in cash to offset that, meaning it has US$2.38m net cash.

A Look At Northern Vertex Mining's Liabilities

The latest balance sheet data shows that Northern Vertex Mining had liabilities of US$22.0m due within a year, and liabilities of US$36.8m falling due after that. On the other hand, it had cash of US$8.29m and US$57.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$50.4m.

While this might seem like a lot, it is not so bad since Northern Vertex Mining has a market capitalization of US$118.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Northern Vertex Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Northern Vertex Mining made a loss at the EBIT level, last year, it was also good to see that it generated US$30m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Northern Vertex Mining's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Northern Vertex Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent year, Northern Vertex Mining recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Northern Vertex Mining does have more liabilities than liquid assets, it also has net cash of US$2.38m. So we don't have any problem with Northern Vertex Mining's use of debt. 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. For instance, we've identified 3 warning signs for Northern Vertex Mining (2 are a bit concerning) 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.

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This article by Simply Wall St is general in nature. 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.
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