Why working capital management saved the day for Peabody

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Debt management

Peabody Energy (BTU) reported a total debt of $6 billion on June 30, 2014. The debt level has remained in line with March 31, 2014, and December 31, 2013. While debt has remained steady, the leverage, as measured by debt to earnings before interest, taxes, depreciation, and amortization (or EBITDA) has deteriorated to 7x for 2Q14 from 5.7x for fiscal year 2013 on account of lower EBITDA. While the leverage position of the company is better than some of its key competitors like Alpha Natural Resources (ANR) and Arch Coal (ACI), Cloud Peak Energy (CLD) has been able to manage its balance sheet better.

Debt to EBITDA

Working capital management

A reason why the company has been able to keep its debt level steady, in spite of the losses, lies in the company’s working capital management.

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The company’s accounts receivables reduced to $447 million on June 30, 2014 from $557.9 million on December 31, 2013. The other current assets have also reduced to $316 million from $418 million during the same period. Accounts payable reduced to $1.5 billion on June 30, 2014, from $1.7 billion on December 31, 2013. The better working capital management has resulted in higher cash at $498.4 million—December 31 was $444 million—in spite of the losses.

Liquidity

With only $20.8 million of debt maturing by June 30, 2015, the company is in a comfortable position to meet debt repayments with currently available cash balances.

Investor takeaway

While the coal sector (KOL) is undergoing troubled times, Peabody Energy (BTU) has managed to keep the leverage under control by focusing on working capital management. The relatively strong balance sheet should help the company pass through difficult time in future quarters. However, long-term prospects depend on demand for coal and the trajectory coal prices will take.

To learn what the market expectations were for Peabody Energy’s second quarter earnings and how it reacted to the results, continue reading the next section in this series.

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