We Think Atlas Energy Solutions (NYSE:AESI) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Atlas Energy Solutions Inc. (NYSE:AESI) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Atlas Energy Solutions

How Much Debt Does Atlas Energy Solutions Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Atlas Energy Solutions had US$172.5m of debt, an increase on US$155.0m, over one year. However, it does have US$264.5m in cash offsetting this, leading to net cash of US$92.0m.

How Healthy Is Atlas Energy Solutions' Balance Sheet?

According to the last reported balance sheet, Atlas Energy Solutions had liabilities of US$100.6m due within 12 months, and liabilities of US$227.6m due beyond 12 months. Offsetting this, it had US$264.5m in cash and US$102.2m in receivables that were due within 12 months. So it actually has US$38.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Atlas Energy Solutions could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Atlas Energy Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Atlas Energy Solutions has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Atlas Energy Solutions'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Atlas Energy Solutions 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. In the last three years, Atlas Energy Solutions created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Atlas Energy Solutions has US$92.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 58% over the last year. So we don't think Atlas Energy Solutions's use of debt is risky. 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. For example Atlas Energy Solutions has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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. 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.