Ramaco Resources (NASDAQ:METC) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ramaco Resources, Inc. (NASDAQ:METC) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ramaco Resources

What Is Ramaco Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Ramaco Resources had US$40.8m of debt, an increase on US$25.9m, over one year. However, it does have US$46.7m in cash offsetting this, leading to net cash of US$5.84m.

How Healthy Is Ramaco Resources' Balance Sheet?

We can see from the most recent balance sheet that Ramaco Resources had liabilities of US$45.3m falling due within a year, and liabilities of US$60.0m due beyond that. On the other hand, it had cash of US$46.7m and US$37.6m worth of receivables due within a year. So its liabilities total US$21.0m more than the combination of its cash and short-term receivables.

Of course, Ramaco Resources has a market capitalization of US$583.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ramaco Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Ramaco Resources made a loss at the EBIT level, last year, but improved that to positive EBIT of US$8.7m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ramaco Resources 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 company can only pay off debt with cold hard cash, not accounting profits. While Ramaco Resources 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. Over the last year, Ramaco Resources actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Ramaco Resources's liabilities, but we can be reassured by the fact it has has net cash of US$5.84m. And it impressed us with free cash flow of US$28m, being 325% of its EBIT. So is Ramaco Resources'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 6 warning signs for Ramaco Resources you should be aware of, and 1 of them is a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.