Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Whitehaven Coal Limited (ASX:WHC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Whitehaven Coal
The image below, which you can click on for greater detail, shows that Whitehaven Coal had debt of AU$42.2m at the end of June 2022, a reduction from AU$729.8m over a year. However, its balance sheet shows it holds AU$1.22b in cash, so it actually has AU$1.17b net cash.
Zooming in on the latest balance sheet data, we can see that Whitehaven Coal had liabilities of AU$1.05b due within 12 months and liabilities of AU$863.1m due beyond that. Offsetting these obligations, it had cash of AU$1.22b as well as receivables valued at AU$657.5m due within 12 months. So it has liabilities totalling AU$40.0m more than its cash and near-term receivables, combined.
This state of affairs indicates that Whitehaven Coal's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$7.77b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Whitehaven Coal boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Whitehaven Coal turned things around in the last 12 months, delivering and EBIT of AU$2.8b. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Whitehaven 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. Whitehaven 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 last year, Whitehaven Coal recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
We could understand if investors are concerned about Whitehaven Coal's liabilities, but we can be reassured by the fact it has has net cash of AU$1.17b. And it impressed us with free cash flow of AU$2.4b, being 84% of its EBIT. So we don't think Whitehaven Coal's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Whitehaven Coal (including 1 which is significant) .
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.
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Whitehaven Coal Limited develops and operates coal mines in New South Wales and Queensland.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet average dividend payer.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Whitehaven Coal Limited develops and operates coal mines in New South Wales and Queensland.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet average dividend payer.
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