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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 CONSOL Energy Inc. (NYSE:CEIX) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at 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$183.2m of debt in June 2024, down from US$209.5m, one year before. However, its balance sheet shows it holds US$299.5m in cash, so it actually has US$116.2m net cash.

A Look At CONSOL Energy's Liabilities

The latest balance sheet data shows that CONSOL Energy had liabilities of US$400.1m due within a year, and liabilities of US$872.0m falling due after that. Offsetting this, it had US$299.5m in cash and US$159.6m in receivables that were due within 12 months. So its liabilities total US$813.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since CONSOL Energy has a market capitalization of US$2.69b, 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.

In fact CONSOL Energy's saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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'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. 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. Over the last three years, CONSOL Energy recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually 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$116.2m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in US$388m. So we are not troubled with CONSOL Energy's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with CONSOL Energy (including 1 which doesn't sit too well with us) .

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.