Is Alpha Metallurgical Resources (NYSE:AMR) Using Too Much Debt?

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. As with many other companies Alpha Metallurgical Resources, Inc. (NYSE:AMR) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View 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 as of June 2023 Alpha Metallurgical Resources had US$6.36m of debt, an increase on US$4.69m, over one year. But on the other hand it also has US$312.4m in cash, leading to a US$306.0m net cash position.

How Strong Is Alpha Metallurgical Resources' Balance Sheet?

According to the last reported balance sheet, Alpha Metallurgical Resources had liabilities of US$295.7m due within 12 months, and liabilities of US$495.4m due beyond 12 months. Offsetting this, it had US$312.4m in cash and US$432.0m in receivables that were due within 12 months. So it has liabilities totalling US$46.7m 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$3.43b 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 fact Alpha Metallurgical Resources's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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, 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 73% 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$306.0m. And it impressed us with free cash flow of US$953m, being 73% of its EBIT. So we are not troubled with Alpha Metallurgical Resources's debt use. There's no doubt that we learn most about debt from the balance sheet. 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 (of which 1 shouldn't be ignored!) you should know about.

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.