NMDC (NSE:NMDC) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, NMDC Limited (NSE:NMDC) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, 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 at March 2021 NMDC had debt of ₹19.9b, up from ₹5.66b in one year. But it also has ₹61.5b in cash to offset that, meaning it has ₹41.6b net cash.

How Strong Is NMDC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NMDC had liabilities of ₹55.4b due within 12 months and liabilities of ₹15.0b due beyond that. On the other hand, it had cash of ₹61.5b and ₹21.4b worth of receivables due within a year. So it can boast ₹12.6b more liquid assets than total liabilities.

This surplus suggests that NMDC has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NMDC has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, NMDC grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NMDC can strengthen its balance sheet over time. 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. While NMDC 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. In the last three years, NMDC's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case NMDC has ₹41.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 50% year-on-year EBIT growth. So we don't think NMDC's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with NMDC .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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