Is Warrior Met Coal (NYSE:HCC) 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. As with many other companies Warrior Met Coal, Inc. (NYSE:HCC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

Check out our latest analysis for Warrior Met Coal

How Much Debt Does Warrior Met Coal Carry?

You can click the graphic below for the historical numbers, but it shows that Warrior Met Coal had US$152.9m of debt in September 2023, down from US$303.9m, one year before. However, it does have US$695.7m in cash offsetting this, leading to net cash of US$542.8m.

How Healthy Is Warrior Met Coal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Warrior Met Coal had liabilities of US$144.0m due within 12 months and liabilities of US$330.1m due beyond that. On the other hand, it had cash of US$695.7m and US$268.1m worth of receivables due within a year. So it actually has US$489.8m more liquid assets than total liabilities.

This excess liquidity suggests that Warrior Met Coal is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Warrior Met Coal boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Warrior Met Coal's load is not too heavy, because its EBIT was down 40% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Warrior Met Coal'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Warrior Met Coal 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 three years, Warrior Met Coal recorded free cash flow worth 74% 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

While it is always sensible to investigate a company's debt, in this case Warrior Met Coal has US$542.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$255m, being 74% of its EBIT. So we don't have any problem with Warrior Met Coal's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Warrior Met Coal is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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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.