Alpha Metallurgical Resources (NYSE:AMR) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Alpha Metallurgical Resources, Inc. (NYSE:AMR) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

Check out our latest analysis for Alpha Metallurgical Resources

What Is Alpha Metallurgical Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that Alpha Metallurgical Resources had US$4.70m of debt in September 2022, down from US$505.2m, one year before. However, it does have US$404.4m in cash offsetting this, leading to net cash of US$399.7m.

A Look At Alpha Metallurgical Resources' Liabilities

We can see from the most recent balance sheet that Alpha Metallurgical Resources had liabilities of US$341.3m falling due within a year, and liabilities of US$546.8m due beyond that. Offsetting this, it had US$404.4m in cash and US$487.4m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Alpha Metallurgical Resources' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$2.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Alpha Metallurgical Resources has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Alpha Metallurgical Resources grew its EBIT by 1,062% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last two years, Alpha Metallurgical Resources produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alpha Metallurgical Resources has US$399.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,062% over the last year. So is Alpha Metallurgical Resources's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alpha Metallurgical Resources you should know about.

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.