Alpha Metallurgical Resources (NYSE:AMR) Has A Pretty Healthy Balance Sheet

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 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 Alpha Metallurgical Resources, Inc. (NYSE:AMR) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Alpha Metallurgical Resources

What Is Alpha Metallurgical Resources's Net Debt?

As you can see below, Alpha Metallurgical Resources had US$4.69m of debt at June 2022, down from US$579.7m a year prior. But it also has US$161.7m in cash to offset that, meaning it has US$157.0m net cash.

How Healthy Is Alpha Metallurgical Resources' Balance Sheet?

The latest balance sheet data shows that Alpha Metallurgical Resources had liabilities of US$345.5m due within a year, and liabilities of US$551.1m falling due after that. Offsetting this, it had US$161.7m in cash and US$721.8m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Alpha Metallurgical Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Alpha Metallurgical Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Alpha Metallurgical Resources made a loss at the EBIT level, last year, it was also good to see that it generated US$1.5b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alpha Metallurgical Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alpha Metallurgical Resources 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 most recent year, Alpha Metallurgical Resources recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Alpha Metallurgical Resources's liabilities, but we can be reassured by the fact it has has net cash of US$157.0m. So we don't think Alpha Metallurgical Resources's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Alpha Metallurgical Resources you should be aware of, and 2 of them are potentially serious.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.