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

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.' 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?

What Risk Does Debt Bring?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Alpha Metallurgical Resources

How Much Debt Does Alpha Metallurgical Resources Carry?

As you can see below, Alpha Metallurgical Resources had US$2.35m of debt at September 2024, down from US$5.73m a year prior. But on the other hand it also has US$484.6m in cash, leading to a US$482.2m net cash position.

How Strong Is Alpha Metallurgical Resources' Balance Sheet?

The latest balance sheet data shows that Alpha Metallurgical Resources had liabilities of US$304.6m due within a year, and liabilities of US$524.2m falling due after that. Offsetting these obligations, it had cash of US$484.6m as well as receivables valued at US$375.9m due within 12 months. So it can boast US$31.6m more liquid assets than total liabilities.

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$2.47b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 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 51% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alpha Metallurgical 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, 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. During the last three years, Alpha Metallurgical Resources generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alpha Metallurgical Resources has US$482.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$505m, being 81% of its EBIT. So we don't have any problem with Alpha Metallurgical Resources's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Alpha Metallurgical Resources you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.