National Aluminium (NSE:NATIONALUM) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that National Aluminium Company Limited (NSE:NATIONALUM) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for National Aluminium

How Much Debt Does National Aluminium Carry?

The image below, which you can click on for greater detail, shows that National Aluminium had debt of ₹206.7m at the end of March 2022, a reduction from ₹461.1m over a year. However, its balance sheet shows it holds ₹37.7b in cash, so it actually has ₹37.5b net cash.

How Strong Is National Aluminium's Balance Sheet?

We can see from the most recent balance sheet that National Aluminium had liabilities of ₹31.0b falling due within a year, and liabilities of ₹16.2b due beyond that. On the other hand, it had cash of ₹37.7b and ₹1.64b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.90b.

Given National Aluminium has a market capitalization of ₹170.6b, it's hard to believe these liabilities pose much 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!

Even more impressive was the fact that National Aluminium grew its EBIT by 209% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 National Aluminium will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While National Aluminium 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. Over the most recent two years, National Aluminium recorded free cash flow worth 75% 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.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that National Aluminium has ₹37.5b in net cash. And it impressed us with its EBIT growth of 209% over the last year. So is National Aluminium's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for National Aluminium that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.