Health Check: How Prudently Does NACCO Industries (NYSE:NC) Use Debt?

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 NACCO Industries, Inc. (NYSE:NC) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NACCO Industries

How Much Debt Does NACCO Industries Carry?

The image below, which you can click on for greater detail, shows that at March 2024 NACCO Industries had debt of US$49.9m, up from US$20.4m in one year. But on the other hand it also has US$61.8m in cash, leading to a US$12.0m net cash position.

How Strong Is NACCO Industries' Balance Sheet?

According to the last reported balance sheet, NACCO Industries had liabilities of US$63.9m due within 12 months, and liabilities of US$92.5m due beyond 12 months. Offsetting these obligations, it had cash of US$61.8m as well as receivables valued at US$37.2m due within 12 months. So its liabilities total US$57.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because NACCO Industries is worth US$224.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, NACCO Industries also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is NACCO Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year NACCO Industries had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to US$218m. That's not what we would hope to see.

So How Risky Is NACCO Industries?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NACCO Industries had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$50m and booked a US$41m accounting loss. With only US$12.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 2 warning signs for NACCO Industries 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com