These 4 Measures Indicate That NMDC (NSE:NMDC) Is Using Debt Safely

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. As with many other companies NMDC Limited (NSE:NMDC) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 NMDC

What Is NMDC's Debt?

As you can see below, at the end of September 2024, NMDC had ₹41.6b of debt, up from ₹21.4b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹142.6b in cash, so it actually has ₹101.1b 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 ₹99.0b due within 12 months and liabilities of ₹16.5b due beyond that. Offsetting this, it had ₹142.6b in cash and ₹46.6b in receivables that were due within 12 months. So it actually has ₹73.9b 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. Succinctly put, NMDC boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that NMDC has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NMDC can strengthen its balance sheet over time. 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. 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. Looking at the most recent three years, NMDC recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NMDC has net cash of ₹101.1b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. So is NMDC's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with NMDC (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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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.