Is Whitehaven Coal (ASX:WHC) Weighed On By Its Debt Load?

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 can see that Whitehaven Coal Limited (ASX:WHC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Whitehaven Coal

How Much Debt Does Whitehaven Coal Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Whitehaven Coal had AU$727.6m of debt, an increase on AU$561.1m, over one year. On the flip side, it has AU$99.8m in cash leading to net debt of about AU$627.7m.

How Healthy Is Whitehaven Coal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Whitehaven Coal had liabilities of AU$325.3m due within 12 months and liabilities of AU$1.58b due beyond that. On the other hand, it had cash of AU$99.8m and AU$114.4m worth of receivables due within a year. So it has liabilities totalling AU$1.70b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of AU$1.37b, we think shareholders really should watch Whitehaven Coal's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Whitehaven Coal's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Whitehaven Coal had a loss before interest and tax, and actually shrunk its revenue by 27%, to AU$1.5b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Whitehaven Coal's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at AU$77m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$87m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Whitehaven Coal you should be aware of.

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.

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This article by Simply Wall St is general in nature. 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.
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