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Does Warrior Met Coal (NYSE:HCC) Have A Healthy Balance Sheet?
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 Warrior Met Coal, Inc. (NYSE:HCC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Warrior Met Coal's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Warrior Met Coal had US$153.3m of debt in June 2024, down from US$295.3m, one year before. However, it does have US$718.3m in cash offsetting this, leading to net cash of US$565.0m.
A Look At Warrior Met Coal's Liabilities
Zooming in on the latest balance sheet data, we can see that Warrior Met Coal had liabilities of US$174.3m due within 12 months and liabilities of US$338.1m due beyond that. On the other hand, it had cash of US$718.3m and US$182.7m worth of receivables due within a year. So it can boast US$388.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Warrior Met Coal could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Warrior Met Coal boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Warrior Met Coal's EBIT dived 18%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Warrior Met Coal 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Warrior Met Coal 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, Warrior Met Coal recorded free cash flow worth 59% 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 we empathize with investors who find debt concerning, you should keep in mind that Warrior Met Coal has net cash of US$565.0m, as well as more liquid assets than liabilities. So we don't have any problem with Warrior Met Coal's use of debt. 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. We've identified 2 warning signs with Warrior Met Coal , and understanding them should be part of your investment process.
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.
About NYSE:HCC
Warrior Met Coal
Engages in the production and export of non-thermal steelmaking metallurgical coal for the steel production by metal manufacturers in Europe, South America, and Asia.