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, CONSOL Energy Inc. (NYSE:CEIX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

How Much Debt Does CONSOL Energy Carry?

As you can see below, CONSOL Energy had US$579.3m of debt at March 2021, down from US$648.6m a year prior. On the flip side, it has US$91.2m in cash leading to net debt of about US$488.2m.

How Healthy Is CONSOL Energy’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CONSOL Energy had liabilities of US$371.2m due within 12 months and liabilities of US$1.57b due beyond that. On the other hand, it had cash of US$91.2m and US$166.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.68b.

This deficit casts a shadow over the US$576.5m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. At the end of the day, CONSOL Energy would probably need a major re-capitalization if its creditors were to demand repayment. 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 CONSOL Energy can strengthen its balance sheet over time.

Over 12 months, CONSOL Energy made a loss at the EBIT level, and saw its revenue drop to US$944m, which is a fall of 29%. To be frank that doesn’t bode well.

Caveat Emptor

Not only did CONSOL Energy’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$17m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. However, we note that trailing twelve month EBIT is worse than the free cash flow of US$83m and the profit of US$14m. So one might argue that there’s still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it.