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 can see that NACCO Industries, Inc. (NYSE:NC) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.
What Is NACCO Industries's Net Debt?
As you can see below, at the end of September 2019, NACCO Industries had US$7.42m of debt, up from US$17.5 a year ago. Click the image for more detail. But on the other hand it also has US$115.1m in cash, leading to a US$107.6m net cash position.
How Healthy Is NACCO Industries's Balance Sheet?
We can see from the most recent balance sheet that NACCO Industries had liabilities of US$52.8m falling due within a year, and liabilities of US$76.7m due beyond that. Offsetting this, it had US$115.1m in cash and US$19.6m in receivables that were due within 12 months. So it actually has US$5.19m more liquid assets than total liabilities.
This state of affairs indicates that NACCO Industries's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$324.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that NACCO Industries has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NACCO Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year NACCO Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$153m. With any luck the company will be able to grow its way to profitability.
So How Risky Is NACCO Industries?
While NACCO Industries lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$44m. 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. We think its revenue growth of 25% is a good sign. We'd see further strong growth as an optimistic indication. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how NACCO Industries's profit, revenue, and operating cashflow have changed over the last few years.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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