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.' 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. We note that Northern Star Resources Limited (ASX:NST) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company 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 and debt together.

Check out our latest analysis for Northern Star Resources

How Much Debt Does Northern Star Resources Carry?

As you can see below, at the end of December 2018, Northern Star Resources had AU$41.6m of debt, up from AU$12.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$229.8m in cash, so it actually has AU$188.3m net cash.

A Look At Northern Star Resources's Liabilities

We can see from the most recent balance sheet that Northern Star Resources had liabilities of AU$218.7m falling due within a year, and liabilities of AU$332.6m due beyond that. Offsetting these obligations, it had cash of AU$229.8m as well as receivables valued at AU$46.2m due within 12 months. So its liabilities total AU$275.2m more than the combination of its cash and short-term receivables.

Since publicly traded Northern Star Resources shares are worth a total of AU$8.03b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Northern Star Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Northern Star Resources grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.