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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies NACCO Industries, Inc. (NYSE:NC) makes use of debt. But is this debt a concern to shareholders?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NACCO Industries

What Is NACCO Industries's Debt?

The image below, which you can click on for greater detail, shows that NACCO Industries had debt of US$20.4m at the end of March 2023, a reduction from US$25.5m over a year. However, it does have US$109.6m in cash offsetting this, leading to net cash of US$89.3m.

How Healthy Is NACCO Industries' Balance Sheet?

According to the last reported balance sheet, NACCO Industries had liabilities of US$34.0m due within 12 months, and liabilities of US$96.4m due beyond 12 months. Offsetting this, it had US$109.6m in cash and US$50.6m in receivables that were due within 12 months. So it can boast US$29.8m more liquid assets than total liabilities.

This surplus suggests that NACCO Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NACCO Industries boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NACCO Industries will need earnings to service that debt. 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.

Over 12 months, NACCO Industries reported revenue of US$237m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$67m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for NACCO Industries that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.