Does NMDC Steel (NSE:NSLNISP) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We can see that NMDC Steel Limited (NSE:NSLNISP) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NMDC Steel

What Is NMDC Steel's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 NMDC Steel had debt of ₹66.5b, up from ₹38.4b in one year. However, because it has a cash reserve of ₹7.21b, its net debt is less, at about ₹59.3b.

How Strong Is NMDC Steel's Balance Sheet?

According to the last reported balance sheet, NMDC Steel had liabilities of ₹71.1b due within 12 months, and liabilities of ₹67.7b due beyond 12 months. Offsetting these obligations, it had cash of ₹7.21b as well as receivables valued at ₹476.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹131.1b.

This deficit is considerable relative to its market capitalization of ₹174.0b, so it does suggest shareholders should keep an eye on NMDC Steel's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NMDC Steel will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year NMDC Steel managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

Caveat Emptor

Despite the top line growth, NMDC Steel still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹20b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹33b of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NMDC Steel you should know about.

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.