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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Warrior Met Coal, Inc. (NYSE:HCC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Warrior Met Coal's Net Debt?
As you can see below, Warrior Met Coal had US$340.4m of debt at June 2022, down from US$380.3m a year prior. But it also has US$644.9m in cash to offset that, meaning it has US$304.5m net cash.
How Healthy Is Warrior Met Coal's Balance Sheet?
We can see from the most recent balance sheet that Warrior Met Coal had liabilities of US$144.5m falling due within a year, and liabilities of US$463.4m due beyond that. Offsetting these obligations, it had cash of US$644.9m as well as receivables valued at US$295.0m due within 12 months. So it can boast US$332.0m more liquid assets than total liabilities.
This surplus suggests that Warrior Met Coal is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Warrior Met Coal has more cash than debt is arguably a good indication that it can manage its debt safely.
Although Warrior Met Coal made a loss at the EBIT level, last year, it was also good to see that it generated US$822m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept 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 year, Warrior Met Coal recorded free cash flow worth 63% 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.
While it is always sensible to investigate a company's debt, in this case Warrior Met Coal has US$304.5m in net cash and a decent-looking balance sheet. So we don't think Warrior Met Coal's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Warrior Met Coal has 1 warning sign we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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Warrior Met Coal
Warrior Met Coal, Inc. produces and exports non-thermal metallurgical coal for the steel industry.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
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Excellent balance sheet and fair value.