Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Peabody Energy Corporation (NYSE:BTU) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Peabody Energy Carry?
The chart below, which you can click on for greater detail, shows that Peabody Energy had US$1.30b in debt in March 2020; about the same as the year before. However, because it has a cash reserve of US$682.5m, its net debt is less, at about US$615.3m.
How Healthy Is Peabody Energy's Balance Sheet?
According to the last reported balance sheet, Peabody Energy had liabilities of US$806.0m due within 12 months, and liabilities of US$2.89b due beyond 12 months. Offsetting these obligations, it had cash of US$682.5m as well as receivables valued at US$265.2m due within 12 months. So its liabilities total US$2.7b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$322.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Peabody Energy would likely require a major re-capitalisation if it had to pay its creditors today. 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 Peabody 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.
Over 12 months, Peabody Energy made a loss at the EBIT level, and saw its revenue drop to US$4.2b, which is a fall of 21%. That makes us nervous, to say the least.
While Peabody Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$157.3m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost US$469.6m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Peabody Energy is showing 2 warning signs in our investment analysis , you should know about...
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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