Does Whitehaven Coal (ASX:WHC) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Whitehaven Coal Limited (ASX:WHC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Whitehaven Coal

What Is Whitehaven Coal's Debt?

As you can see below, Whitehaven Coal had AU$36.0m of debt at June 2023, down from AU$42.2m a year prior. But on the other hand it also has AU$2.78b in cash, leading to a AU$2.74b net cash position.

How Healthy Is Whitehaven Coal's Balance Sheet?

We can see from the most recent balance sheet that Whitehaven Coal had liabilities of AU$1.31b falling due within a year, and liabilities of AU$939.6m due beyond that. On the other hand, it had cash of AU$2.78b and AU$324.9m worth of receivables due within a year. So it actually has AU$850.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Whitehaven Coal could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Whitehaven Coal boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Whitehaven Coal has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 Whitehaven Coal 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Whitehaven Coal has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Whitehaven Coal recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Whitehaven Coal has AU$2.74b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in AU$3.3b. So is Whitehaven Coal's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Whitehaven Coal (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.