Peabody Energy (NYSE:BTU) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Peabody Energy Corporation (NYSE:BTU) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Peabody Energy

What Is Peabody Energy's Debt?

The image below, which you can click on for greater detail, shows that Peabody Energy had debt of US$311.0m at the end of June 2023, a reduction from US$1.02b over a year. But on the other hand it also has US$1.08b in cash, leading to a US$769.5m net cash position.

How Strong Is Peabody Energy's Balance Sheet?

We can see from the most recent balance sheet that Peabody Energy had liabilities of US$905.1m falling due within a year, and liabilities of US$1.40b due beyond that. Offsetting this, it had US$1.08b in cash and US$325.5m in receivables that were due within 12 months. So its liabilities total US$898.8m more than the combination of its cash and short-term receivables.

Peabody Energy has a market capitalization of US$2.90b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Peabody Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Peabody Energy grew its EBIT by 145% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Peabody Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Peabody Energy generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Peabody Energy does have more liabilities than liquid assets, it also has net cash of US$769.5m. And it impressed us with free cash flow of US$1.6b, being 82% of its EBIT. So is Peabody Energy's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Peabody Energy 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. 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.