These 4 Measures Indicate That CONSOL Energy (NYSE:CEIX) Is Using Debt Safely

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 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. We can see that CONSOL Energy Inc. (NYSE:CEIX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CONSOL Energy

How Much Debt Does CONSOL Energy Carry?

The image below, which you can click on for greater detail, shows that CONSOL Energy had debt of US$183.5m at the end of December 2023, a reduction from US$346.9m over a year. But on the other hand it also has US$281.3m in cash, leading to a US$97.8m net cash position.

A Look At CONSOL Energy's Liabilities

The latest balance sheet data shows that CONSOL Energy had liabilities of US$443.7m due within a year, and liabilities of US$887.8m falling due after that. Offsetting these obligations, it had cash of US$281.3m as well as receivables valued at US$160.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$889.9m.

While this might seem like a lot, it is not so bad since CONSOL Energy has a market capitalization of US$2.44b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, CONSOL Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CONSOL Energy has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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. While CONSOL 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 three years, CONSOL Energy generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although CONSOL Energy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$97.8m. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in US$690m. So we don't think CONSOL Energy's use of debt is risky. 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. Be aware that CONSOL Energy is showing 1 warning sign in our investment analysis , you should know about...

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.