Would Hallador Energy (NASDAQ:HNRG) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hallador Energy Company (NASDAQ:HNRG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hallador Energy

What Is Hallador Energy's Debt?

As you can see below, at the end of September 2022, Hallador Energy had US$129.2m of debt, up from US$111.9m a year ago. Click the image for more detail. However, it does have US$7.00m in cash offsetting this, leading to net debt of about US$122.2m.

How Healthy Is Hallador Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hallador Energy had liabilities of US$162.6m due within 12 months and liabilities of US$36.8m due beyond that. On the other hand, it had cash of US$7.00m and US$16.7m worth of receivables due within a year. So it has liabilities totalling US$175.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$269.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hallador Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Hallador Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to US$275m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Hallador Energy produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$5.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$23m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hallador Energy is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.