Is Coronado Global Resources (ASX:CRN) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Coronado Global Resources Inc. (ASX:CRN) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Coronado Global Resources
What Is Coronado Global Resources's Net Debt?
As you can see below, Coronado Global Resources had US$322.5m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$437.9m in cash offsetting this, leading to net cash of US$115.4m.
How Healthy Is Coronado Global Resources' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Coronado Global Resources had liabilities of US$472.5m due within 12 months and liabilities of US$911.4m due beyond that. Offsetting these obligations, it had cash of US$437.9m as well as receivables valued at US$276.4m due within 12 months. So it has liabilities totalling US$669.6m more than its cash and near-term receivables, combined.
Coronado Global Resources has a market capitalization of US$2.86b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Coronado Global Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Coronado Global Resources made a loss at the EBIT level, last year, but improved that to positive EBIT of US$305m in the last twelve months. 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 Coronado Global 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. Coronado Global 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 year, Coronado Global Resources actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While Coronado Global Resources does have more liabilities than liquid assets, it also has net cash of US$115.4m. And it impressed us with free cash flow of US$352m, being 116% of its EBIT. So we don't have any problem with Coronado Global Resources's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Coronado Global Resources you should be aware of, and 1 of them is significant.
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.
