Is Alpha Metallurgical Resources (NYSE:AMR) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Alpha Metallurgical Resources, Inc. (NYSE:AMR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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$3.91m of debt in June 2024, down from US$6.36m, one year before. However, it does have US$336.1m in cash offsetting this, leading to net cash of US$332.2m.

How Healthy Is Alpha Metallurgical Resources' Balance Sheet?

We can see from the most recent balance sheet that Alpha Metallurgical Resources had liabilities of US$308.7m falling due within a year, and liabilities of US$540.7m due beyond that. Offsetting this, it had US$336.1m in cash and US$505.1m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

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$2.95b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Alpha Metallurgical Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Alpha Metallurgical Resources's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alpha Metallurgical Resources can strengthen its balance sheet over time. 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. 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 three years, Alpha Metallurgical Resources recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$332.2m in net cash. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in US$450m. So we are not troubled with Alpha Metallurgical Resources's debt use. 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. Be aware that Alpha Metallurgical Resources is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.