Stock Analysis

Is Newmont (NYSE:NEM) Using Too Much Debt?

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NYSE:NEM
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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 note that Newmont Corporation (NYSE:NEM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the US Metals and Mining industry.

How Much Debt Does Newmont Carry?

As you can see below, Newmont had US$5.57b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$4.36b in cash offsetting this, leading to net debt of about US$1.21b.

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NYSE:NEM Debt to Equity History October 24th 2022

A Look At Newmont's Liabilities

We can see from the most recent balance sheet that Newmont had liabilities of US$2.45b falling due within a year, and liabilities of US$15.6b due beyond that. Offsetting these obligations, it had cash of US$4.36b as well as receivables valued at US$364.0m due within 12 months. So it has liabilities totalling US$13.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Newmont is worth a massive US$33.6b, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Newmont's low debt to EBITDA ratio of 0.30 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 6.8 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. The modesty of its debt load may become crucial for Newmont if management cannot prevent a repeat of the 62% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Newmont'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Newmont actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Newmont's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to to convert EBIT to free cash flow is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Newmont's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. Case in point: We've spotted 3 warning signs for Newmont 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.

What are the risks and opportunities for Newmont?

Newmont Corporation engages in the production and exploration of gold.

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Rewards

  • Trading at 31.8% below our estimate of its fair value

  • Earnings are forecast to grow 7.56% per year

Risks

  • Profit margins (8%) are lower than last year (16.2%)

  • Large one-off items impacting financial results

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