We Think NMDC (NSE:NMDC) Can Stay On Top Of Its 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. Importantly, NMDC Limited (NSE:NMDC) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NMDC

What Is NMDC's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 NMDC had ₹22.2b of debt, an increase on ₹9.68b, over one year. However, it does have ₹86.9b in cash offsetting this, leading to net cash of ₹64.7b.

A Look At NMDC's Liabilities

We can see from the most recent balance sheet that NMDC had liabilities of ₹47.9b falling due within a year, and liabilities of ₹12.8b due beyond that. Offsetting this, it had ₹86.9b in cash and ₹26.0b in receivables that were due within 12 months. So it actually has ₹52.2b 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!

It is just as well that NMDC's load is not too heavy, because its EBIT was down 45% 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 36% of its EBIT, less 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 ₹64.7b, as well as more liquid assets than liabilities. So we don't have any problem with NMDC's use of debt. 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 4 warning signs for NMDC you should be aware of, and 2 of them are significant.

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.