Is NACCO Industries (NYSE:NC) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that NACCO Industries, Inc. (NYSE:NC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for NACCO Industries

What Is NACCO Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that NACCO Industries had US$17.0m of debt in September 2021, down from US$45.0m, one year before. But it also has US$87.5m in cash to offset that, meaning it has US$70.5m net cash.

How Strong Is NACCO Industries' Balance Sheet?

According to the last reported balance sheet, NACCO Industries had liabilities of US$40.9m due within 12 months, and liabilities of US$107.1m due beyond 12 months. On the other hand, it had cash of US$87.5m and US$34.5m worth of receivables due within a year. So it has liabilities totalling US$26.0m more than its cash and near-term receivables, combined.

Given NACCO Industries has a market capitalization of US$183.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to US$192m. With any luck the company will be able to grow its way to profitability.

So How Risky Is NACCO Industries?

While NACCO Industries lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$48m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that NACCO Industries is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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 3 warning signs for NACCO Industries you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.