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Is Northern Star Resources (ASX:NST) Using Debt Sensibly?

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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 Northern Star Resources Limited (ASX:NST) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Northern Star Resources

What Is Northern Star Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Northern Star Resources had AU$658.3m of debt in June 2021, down from AU$697.3m, one year before. But on the other hand it also has AU$771.9m in cash, leading to a AU$113.6m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Northern Star Resources' Liabilities

According to the last reported balance sheet, Northern Star Resources had liabilities of AU$771.6m due within 12 months, and liabilities of AU$2.50b due beyond 12 months. On the other hand, it had cash of AU$771.9m and AU$223.3m worth of receivables due within a year. So its liabilities total AU$2.28b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Northern Star Resources is worth AU$10.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Northern Star Resources boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Northern Star Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Northern Star Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to AU$2.8b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Northern Star Resources?

Although Northern Star Resources had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of AU$1.0b. 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 Northern Star Resources 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Northern Star Resources has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.

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 (at) simplywallst.com.

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