Here's Why NMDC (NSE:NMDC) Can Manage Its Debt Responsibly

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.' 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. Importantly, NMDC Limited (NSE:NMDC) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NMDC

How Much Debt Does NMDC Carry?

The image below, which you can click on for greater detail, shows that NMDC had debt of ₹4.23b at the end of March 2023, a reduction from ₹34.9b over a year. However, it does have ₹65.0b in cash offsetting this, leading to net cash of ₹60.8b.

How Healthy Is NMDC's Balance Sheet?

According to the last reported balance sheet, NMDC had liabilities of ₹42.0b due within 12 months, and liabilities of ₹14.1b due beyond 12 months. Offsetting this, it had ₹65.0b in cash and ₹36.3b in receivables that were due within 12 months. So it actually has ₹45.2b more liquid assets than total liabilities.

This short term liquidity is a sign that NMDC could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NMDC has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that NMDC's load is not too heavy, because its EBIT was down 42% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 NMDC's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NMDC 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, NMDC's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NMDC has net cash of ₹60.8b, as well as more liquid assets than liabilities. So we are not troubled with NMDC's debt use. 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. For instance, we've identified 1 warning sign for NMDC that you should be aware of.

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. 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.