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. As with many other companies Northern Minerals Limited (ASX:NTU) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Northern Minerals

What Is Northern Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Northern Minerals had debt of AU$15.1m, up from AU$14.0m in one year. But on the other hand it also has AU$35.8m in cash, leading to a AU$20.7m net cash position.

How Strong Is Northern Minerals' Balance Sheet?

According to the last reported balance sheet, Northern Minerals had liabilities of AU$23.2m due within 12 months, and liabilities of AU$5.42m due beyond 12 months. On the other hand, it had cash of AU$35.8m and AU$473.5k worth of receivables due within a year. So it can boast AU$7.59m more liquid assets than total liabilities.

This surplus suggests that Northern Minerals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Northern Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Northern Minerals 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.

Since Northern Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Northern Minerals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Northern Minerals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$31m of cash and made a loss of AU$32m. However, it has net cash of AU$20.7m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Northern Minerals (at least 1 which is significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.