Does CONSOL Energy (NYSE:CEIX) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, CONSOL Energy Inc. (NYSE:CEIX) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CONSOL Energy

How Much Debt Does CONSOL Energy Carry?

You can click the graphic below for the historical numbers, but it shows that CONSOL Energy had US$257.7m of debt in March 2023, down from US$574.0m, one year before. However, its balance sheet shows it holds US$268.1m in cash, so it actually has US$10.4m net cash.

How Healthy Is CONSOL Energy's Balance Sheet?

The latest balance sheet data shows that CONSOL Energy had liabilities of US$442.5m due within a year, and liabilities of US$971.9m falling due after that. Offsetting this, it had US$268.1m in cash and US$185.6m in receivables that were due within 12 months. So it has liabilities totalling US$960.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since CONSOL Energy has a market capitalization of US$2.47b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, CONSOL Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, CONSOL Energy grew its EBIT by 3,387% 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 CONSOL Energy can strengthen its balance sheet over time. 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. CONSOL Energy 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. During the last two years, CONSOL Energy generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While CONSOL Energy does have more liabilities than liquid assets, it also has net cash of US$10.4m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$583m. So is CONSOL Energy's debt a risk? It doesn't seem so to us. 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 CONSOL Energy is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.