Is Warrior Met Coal (NYSE:HCC) Using Too Much 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 can see that Warrior Met Coal, Inc. (NYSE:HCC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Warrior Met Coal

What Is Warrior Met Coal's Debt?

As you can see below, Warrior Met Coal had US$295.3m of debt at June 2023, down from US$340.4m a year prior. But it also has US$836.2m in cash to offset that, meaning it has US$540.9m net cash.

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$124.2m due within 12 months and liabilities of US$458.6m due beyond that. Offsetting these obligations, it had cash of US$836.2m as well as receivables valued at US$207.5m due within 12 months. So it actually has US$461.0m 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. 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!

The modesty of its debt load may become crucial for Warrior Met Coal if management cannot prevent a repeat of the 32% cut to EBIT 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 ultimately the future profitability of the business will decide if Warrior Met Coal can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last two years, Warrior Met Coal produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$540.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$429m, being 69% 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. For instance, we've identified 2 warning signs for Warrior Met Coal (1 can't be ignored) you should be aware of.

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.