Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Warrior Met Coal, Inc. (NYSE:HCC) does carry debt. But the real question is whether this debt is making the company risky.
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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Warrior Met Coal Carry?
As you can see below, Warrior Met Coal had US$153.6m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$506.2m in cash, leading to a US$352.6m net cash position.
How Strong Is Warrior Met Coal's Balance Sheet?
We can see from the most recent balance sheet that Warrior Met Coal had liabilities of US$170.4m falling due within a year, and liabilities of US$330.3m due beyond that. Offsetting these obligations, it had cash of US$506.2m as well as receivables valued at US$141.6m due within 12 months. So it can boast US$147.1m more liquid assets than total liabilities.
This surplus suggests that Warrior Met Coal has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Warrior Met Coal has more cash than debt is arguably a good indication that it can manage its debt safely.
View our latest analysis for Warrior Met Coal
In fact Warrior Met Coal's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Warrior Met Coal'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Warrior Met Coal may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Warrior Met Coal recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While it is always sensible to investigate a company's debt, in this case Warrior Met Coal has US$352.6m in net cash and a decent-looking balance sheet. So we are not troubled with Warrior Met Coal's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Warrior Met Coal (1 makes us a bit uncomfortable) you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.