David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Newcrest Mining Limited (ASX:NCM) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Newcrest Mining
What Is Newcrest Mining's Net Debt?
The image below, which you can click on for greater detail, shows that Newcrest Mining had debt of US$1.64b at the end of June 2021, a reduction from US$2.02b over a year. However, its balance sheet shows it holds US$1.99b in cash, so it actually has US$350.0m net cash.
How Strong Is Newcrest Mining's Balance Sheet?
We can see from the most recent balance sheet that Newcrest Mining had liabilities of US$951.0m falling due within a year, and liabilities of US$3.64b due beyond that. Offsetting this, it had US$1.99b in cash and US$218.0m in receivables that were due within 12 months. So it has liabilities totalling US$2.39b more than its cash and near-term receivables, combined.
Of course, Newcrest Mining has a titanic market capitalization of US$14.7b, so these liabilities are probably manageable. 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, Newcrest Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Newcrest Mining grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Newcrest Mining 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. While Newcrest Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Newcrest Mining produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While Newcrest Mining does have more liabilities than liquid assets, it also has net cash of US$350.0m. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Newcrest Mining's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Newcrest Mining (1 is a bit concerning) 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.
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.
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