Is National Aluminium (NSE:NATIONALUM) 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.' 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 note that National Aluminium Company Limited (NSE:NATIONALUM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for National Aluminium

What Is National Aluminium's Debt?

You can click the graphic below for the historical numbers, but it shows that National Aluminium had ₹963.8m of debt in March 2024, down from ₹1.05b, one year before. However, its balance sheet shows it holds ₹27.5b in cash, so it actually has ₹26.5b net cash.

A Look At National Aluminium's Liabilities

Zooming in on the latest balance sheet data, we can see that National Aluminium had liabilities of ₹31.8b due within 12 months and liabilities of ₹16.7b due beyond that. Offsetting this, it had ₹27.5b in cash and ₹4.20b in receivables that were due within 12 months. So it has liabilities totalling ₹16.8b more than its cash and near-term receivables, combined.

Since publicly traded National Aluminium shares are worth a total of ₹335.4b, it seems unlikely that this level of liabilities would be a major threat. 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, National Aluminium also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that National Aluminium has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about National Aluminium's liabilities, but we can be reassured by the fact it has has net cash of ₹26.5b. And we liked the look of last year's 72% year-on-year EBIT growth. So is National Aluminium's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign 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.