Is Warrior Met Coal (NYSE:HCC) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Warrior Met Coal

How Much Debt Does Warrior Met Coal Carry?

The chart below, which you can click on for greater detail, shows that Warrior Met Coal had US$153.5m in debt in September 2024; about the same as the year before. But it also has US$592.6m in cash to offset that, meaning it has US$439.1m net cash.

How Strong Is Warrior Met Coal's Balance Sheet?

The latest balance sheet data shows that Warrior Met Coal had liabilities of US$167.3m due within a year, and liabilities of US$326.3m falling due after that. Offsetting this, it had US$592.6m in cash and US$152.6m in receivables that were due within 12 months. So it can boast US$251.6m 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!

The modesty of its debt load may become crucial for Warrior Met Coal if management cannot prevent a repeat of the 27% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 54% 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$439.1m, as well as more liquid assets than liabilities. So we don't have any problem with Warrior Met Coal's use of debt. 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. We've identified 3 warning signs with Warrior Met Coal (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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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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.