Warrior Met Coal (NYSE:HCC) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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$295.1m of debt in March 2023, down from US$340.1m, one year before. But on the other hand it also has US$871.2m in cash, leading to a US$576.2m net cash position.

How Strong Is Warrior Met Coal's Balance Sheet?

We can see from the most recent balance sheet that Warrior Met Coal had liabilities of US$127.7m falling due within a year, and liabilities of US$445.0m due beyond that. On the other hand, it had cash of US$871.2m and US$208.6m worth of receivables due within a year. So it actually has US$507.2m 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. Due to its strong net asset position, it is not likely to face 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.

On top of that, Warrior Met Coal grew its EBIT by 89% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. Over the most recent two years, Warrior Met Coal recorded free cash flow worth 79% 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$576.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 89% year-on-year EBIT growth. The bottom line is that we do not find Warrior Met Coal's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Warrior Met Coal has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.