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.' 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 National Aluminium Company Limited (NSE:NATIONALUM) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for National Aluminium
How Much Debt Does National Aluminium Carry?
You can click the graphic below for the historical numbers, but it shows that National Aluminium had ₹403.5m of debt in September 2023, down from ₹704.4m, one year before. But on the other hand it also has ₹23.2b in cash, leading to a ₹22.7b net cash position.
How Healthy Is National Aluminium's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that National Aluminium had liabilities of ₹32.0b due within 12 months and liabilities of ₹15.9b due beyond that. Offsetting this, it had ₹23.2b in cash and ₹1.66b in receivables that were due within 12 months. So it has liabilities totalling ₹23.1b more than its cash and near-term receivables, combined.
Since publicly traded National Aluminium shares are worth a total of ₹172.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, National Aluminium boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact National Aluminium's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 National Aluminium'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. National Aluminium may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, National Aluminium's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While National Aluminium does have more liabilities than liquid assets, it also has net cash of ₹22.7b. So we are not troubled with National Aluminium's debt use. 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 National Aluminium you should be aware of.
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.
About NSEI:NATIONALUM
National Aluminium
Engages in the manufacture and sale of alumina and aluminum products in India and internationally.
Solid track record with excellent balance sheet and pays a dividend.