Warrior Met Coal (NYSE:HCC) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Warrior Met Coal, Inc. (NYSE:HCC) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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

What Is Warrior Met Coal's Net Debt?

The image below, which you can click on for greater detail, shows that Warrior Met Coal had debt of US$153.2m at the end of March 2024, a reduction from US$295.1m over a year. However, its balance sheet shows it holds US$703.0m in cash, so it actually has US$549.8m 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$163.0m due within a year, and liabilities of US$337.3m falling due after that. On the other hand, it had cash of US$703.0m and US$213.4m worth of receivables due within a year. So it can boast US$416.0m more liquid assets than total liabilities.

This surplus suggests that Warrior Met Coal has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Warrior Met Coal boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Warrior Met Coal's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 three years, Warrior Met Coal produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Warrior Met Coal has US$549.8m in net cash and a decent-looking balance sheet. So we don't have any problem with Warrior Met Coal's use of debt. 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. We've identified 2 warning signs with Warrior Met Coal , 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.