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David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Newcrest Mining Limited (ASX: NCM) uses debt in his business. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Newcrest Mining
What is Newcrest Mining’s debt?
The image below, which you can click for more details, shows Newcrest Mining had US $ 1.64 billion in debt at the end of June 2021, a reduction from US $ 2.02 billion. over a year. But on the other hand, it also has $ 1.99 billion in cash, which leads to a net cash position of $ 350.0 million.
How healthy is Newcrest Mining’s balance sheet?
The latest balance sheet data shows Newcrest Mining had liabilities of US $ 951.0 million due within one year, and liabilities of US $ 3.64 billion due thereafter. On the other hand, he had $ 1.99 billion in cash and $ 218.0 million in receivables due within one year. It therefore has liabilities totaling US $ 2.39 billion more than its cash and short-term receivables combined.
Given that Newcrest Mining’s publicly traded shares are worth a very impressive US $ 14.1 billion total, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While it has some liabilities to note, Newcrest Mining also has more cash than debt, so we’re pretty confident that it can handle its debt safely.
On top of that, Newcrest Mining has increased its EBIT by 36% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Newcrest Mining can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. Newcrest Mining may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Newcrest Mining has recorded free cash flow of 73% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
In summary
Although Newcrest Mining’s balance sheet is not particularly strong, due to total liabilities it is clearly positive that it has net cash of US $ 350.0 million. And we liked the appearance of the 36% year-over-year EBIT growth from last year. We therefore do not believe that Newcrest Mining’s use of debt is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Newcrest Mining (1 is significant!) That you should know before investing here.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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