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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 NL Industries, Inc. (NYSE:NL) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
View our latest analysis for NL Industries
What Is NL Industries's Debt?
As you can see below, NL Industries had US$500.0k of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has US$128.6m in cash, leading to a US$128.1m net cash position.
How Healthy Is NL Industries's Balance Sheet?
The latest balance sheet data shows that NL Industries had liabilities of US$43.0m due within a year, and liabilities of US$219.2m falling due after that. Offsetting this, it had US$128.6m in cash and US$15.2m in receivables that were due within 12 months. So it has liabilities totalling US$118.4m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$179.9m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, NL Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that NL Industries grew its EBIT by 118% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NL 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.