Northern Vertex Mining (CVE:NEE) Seems To Use Debt Quite Sensibly

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.' 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. We note that Northern Vertex Mining Corp. (CVE:NEE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Northern Vertex Mining

What Is Northern Vertex Mining's Debt?

The image below, which you can click on for greater detail, shows that Northern Vertex Mining had debt of US$14.1m at the end of September 2020, a reduction from US$15.1m over a year. However, because it has a cash reserve of US$12.1m, its net debt is less, at about US$1.95m.

How Healthy Is Northern Vertex Mining's Balance Sheet?

According to the last reported balance sheet, Northern Vertex Mining had liabilities of US$49.8m due within 12 months, and liabilities of US$33.7m due beyond 12 months. Offsetting these obligations, it had cash of US$12.1m as well as receivables valued at US$83.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$71.3m.

This deficit isn't so bad because Northern Vertex Mining is worth US$126.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Northern Vertex Mining's net debt to EBITDA ratio is very low, at 0.081, suggesting the debt is only trivial. Although with EBIT only covering interest expenses 4.1 times over, the company is truly paying for borrowing. We also note that Northern Vertex Mining improved its EBIT from a last year's loss to a positive US$13m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Northern Vertex Mining will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the most recent year, Northern Vertex Mining recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

When it comes to the balance sheet, the standout positive for Northern Vertex Mining was the fact that it seems able handle its debt, based on its EBITDA, confidently. However, our other observations weren't so heartening. For example, its interest cover makes us a little nervous about its debt. Looking at all this data makes us feel a little cautious about Northern Vertex Mining's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. Case in point: We've spotted 3 warning signs for Northern Vertex Mining you should be aware of, and 1 of them is concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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