These 4 Measures Indicate That Alpha Metallurgical Resources (NYSE:AMR) Is Using Debt Reasonably Well

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 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. We note that Alpha Metallurgical Resources, Inc. (NYSE:AMR) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Alpha Metallurgical Resources's Debt?

The image below, which you can click on for greater detail, shows that Alpha Metallurgical Resources had debt of US$1.79m at the end of December 2024, a reduction from US$5.10m over a year. But it also has US$481.6m in cash to offset that, meaning it has US$479.8m net cash.

How Healthy Is Alpha Metallurgical Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alpha Metallurgical Resources had liabilities of US$251.1m due within 12 months and liabilities of US$538.1m due beyond that. Offsetting these obligations, it had cash of US$481.6m as well as receivables valued at US$362.1m due within 12 months. So it actually has US$54.5m more liquid assets than total liabilities.

This surplus suggests that Alpha Metallurgical Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

View our latest analysis for Alpha Metallurgical Resources

The modesty of its debt load may become crucial for Alpha Metallurgical Resources if management cannot prevent a repeat of the 74% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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. 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 three years, Alpha Metallurgical Resources generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alpha Metallurgical Resources has net cash of US$479.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$381m. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Alpha Metallurgical Resources that you should be aware of.

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.