We Think Alpha Metallurgical Resources (NYSE:AMR) Can Stay On Top Of Its Debt

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.' 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?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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$4.46m at the end of March 2024, a reduction from US$6.97m over a year. But on the other hand it also has US$269.4m in cash, leading to a US$264.9m net cash position.

A Look At Alpha Metallurgical Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Alpha Metallurgical Resources had liabilities of US$341.3m due within 12 months and liabilities of US$528.4m due beyond that. Offsetting these obligations, it had cash of US$269.4m as well as receivables valued at US$526.2m due within 12 months. So its liabilities total US$74.1m more than the combination of its cash and short-term receivables.

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$3.73b 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.

It is just as well that Alpha Metallurgical Resources's load is not too heavy, because its EBIT was down 52% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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. 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 73% 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$264.9m in net cash. And it impressed us with free cash flow of US$635m, 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. Be aware that Alpha Metallurgical Resources is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.