Coronado Global Resources (ASX:CRN) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Coronado Global Resources Inc. (ASX:CRN) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Coronado Global Resources

What Is Coronado Global Resources's Net Debt?

As you can see below, Coronado Global Resources had US$322.5m of debt, at December 2021, 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$437.9m in cash, leading to a US$115.4m net cash position.

How Healthy Is Coronado Global Resources' Balance Sheet?

The latest balance sheet data shows that Coronado Global Resources had liabilities of US$472.5m due within a year, and liabilities of US$911.4m falling due after that. Offsetting these obligations, it had cash of US$437.9m as well as receivables valued at US$276.4m due within 12 months. So it has liabilities totalling US$669.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Coronado Global Resources has a market capitalization of US$2.60b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Coronado Global Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Coronado Global Resources improved its EBIT from a last year's loss to a positive US$305m. 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 Coronado Global 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Coronado Global Resources 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. Over the last year, Coronado Global Resources actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Coronado Global Resources does have more liabilities than liquid assets, it also has net cash of US$115.4m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$352m. So we are not troubled with Coronado Global Resources's debt use. 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. Be aware that Coronado Global Resources is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.