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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Arch Resources, Inc. (NYSE:ARCH) makes use of debt. 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. 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. 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.

What Is Arch Resources's Debt?

As you can see below, Arch Resources had US$143.3m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$319.8m in cash to offset that, meaning it has US$176.5m net cash.

How Healthy Is Arch Resources' Balance Sheet?

According to the last reported balance sheet, Arch Resources had liabilities of US$326.8m due within 12 months, and liabilities of US$640.4m due beyond 12 months. Offsetting these obligations, it had cash of US$319.8m as well as receivables valued at US$234.6m due within 12 months. So its liabilities total US$412.9m more than the combination of its cash and short-term receivables.

Of course, Arch Resources has a market capitalization of US$3.07b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Arch Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Arch Resources's load is not too heavy, because its EBIT was down 64% 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 it is future earnings, more than anything, that will determine Arch Resources's ability to maintain a healthy balance sheet going forward. 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. While Arch Resources 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, Arch Resources recorded free cash flow worth 78% 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 Arch Resources does have more liabilities than liquid assets, it also has net cash of US$176.5m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in US$445m. So we are not troubled with Arch Resources's debt use. 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 example, we've discovered 3 warning signs for Arch Resources that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.