The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Alpha Metallurgical Resources, Inc. (NYSE:AMR) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Alpha Metallurgical Resources's Net Debt?

As you can see below, Alpha Metallurgical Resources had US$2.35m of debt at September 2024, down from US$5.73m a year prior. But on the other hand it also has US$484.6m in cash, leading to a US$482.2m net cash position.

A Look At Alpha Metallurgical Resources' Liabilities

We can see from the most recent balance sheet that Alpha Metallurgical Resources had liabilities of US$304.6m falling due within a year, and liabilities of US$524.2m due beyond that. Offsetting these obligations, it had cash of US$484.6m as well as receivables valued at US$375.9m due within 12 months. So it actually has US$31.6m more liquid assets than total liabilities.

This state of affairs indicates that Alpha Metallurgical Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$2.64b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Alpha Metallurgical Resources has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Alpha Metallurgical Resources's load is not too heavy, because its EBIT was down 51% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Alpha Metallurgical 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Alpha Metallurgical Resources 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 last three years, Alpha Metallurgical Resources recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alpha Metallurgical Resources has net cash of US$482.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$505m. So we are not troubled with Alpha Metallurgical Resources's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alpha Metallurgical Resources (of which 1 is a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.