Exxaro Resources (JSE:EXX) Has A Pretty Healthy Balance Sheet

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. Importantly, Exxaro Resources Limited (JSE:EXX) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Exxaro Resources

What Is Exxaro Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Exxaro Resources had R8.40b of debt in June 2024, down from R8.99b, one year before. But on the other hand it also has R18.5b in cash, leading to a R10.1b net cash position.

How Strong Is Exxaro Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Exxaro Resources had liabilities of R5.14b due within 12 months and liabilities of R20.3b due beyond that. Offsetting this, it had R18.5b in cash and R4.13b in receivables that were due within 12 months. So it has liabilities totalling R2.78b more than its cash and near-term receivables, combined.

Since publicly traded Exxaro Resources shares are worth a total of R41.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Exxaro Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Exxaro Resources's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. 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 ultimately the future profitability of the business will decide if Exxaro Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Exxaro Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Exxaro Resources recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Exxaro Resources's liabilities, but we can be reassured by the fact it has has net cash of R10.1b. And it impressed us with free cash flow of R6.6b, being 84% of its EBIT. So we don't have any problem with Exxaro Resources's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Exxaro Resources (including 1 which is potentially serious) .

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.