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Is Alpha Metallurgical Resources (NYSE:AMR) A Risky Investment?
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 Alpha Metallurgical Resources, Inc. (NYSE:AMR) makes use of debt. But is this debt a concern to shareholders?
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. 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.
View our latest analysis for Alpha Metallurgical Resources
How Much Debt Does Alpha Metallurgical Resources Carry?
The image below, which you can click on for greater detail, shows that Alpha Metallurgical Resources had debt of US$6.97m at the end of March 2023, a reduction from US$251.4m over a year. However, it does have US$222.5m in cash offsetting this, leading to net cash of US$215.5m.
A Look At Alpha Metallurgical Resources' Liabilities
We can see from the most recent balance sheet that Alpha Metallurgical Resources had liabilities of US$316.6m falling due within a year, and liabilities of US$483.9m due beyond that. Offsetting this, it had US$222.5m in cash and US$546.3m in receivables that were due within 12 months. So it has liabilities totalling US$31.8m more than its cash and near-term receivables, combined.
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 it's very unlikely that the US$2.38b company is short on cash, but still worth keeping an eye on the 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.
In addition to that, we're happy to report that Alpha Metallurgical Resources has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Alpha Metallurgical 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 most recent two years, Alpha Metallurgical Resources recorded free cash flow worth 68% 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
While it is always sensible to look at a company's total liabilities, it is very reassuring that Alpha Metallurgical Resources has US$215.5m in net cash. And it impressed us with its EBIT growth of 70% over the last year. So we don't think Alpha Metallurgical Resources's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Alpha Metallurgical Resources that you should be aware of.
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.
About NYSE:AMR
Alpha Metallurgical Resources
A mining company, produces, processes, and sells met and thermal coal in Virginia and West Virginia.
Flawless balance sheet and fair value.