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Patriot Coal (PCX) filed for bankruptcy protection on July 10. It wasn't entirely surprising for investors who have been following the coal business closely.

Entangled with wild swing of commodity prices, heavy debt, environmental issues, regulations, accidents, and ample supply of a strong substitute (natural gas), the coal industry often has roller coaster rides in share prices. Hedged with assets, these firms often come out of bankruptcy protection intact, leaving equity holders wiped out in the process.

The big picture? Considering how much coal produced in the United States has been exported to overseas during recent years (mainly Europe and Asia), one has to be concerned about the future for coal in the United States. As supply consistently went above demand, coal miners can only survive with capacity cut and further consolidation in the industry. With this in consideration, I'm not bullish about the sector in general.

More specifically, given what happened to Patriot Coal, which of the other big coal companies are at risk of bankruptcy? In this article, I'll given a quick answer based on the financial strength of each company.

First, let's examine how Patriot Coal went Chapter 11.

Patriot Coal Corporation had a market cap of approximately $200 million right before it filed for bankruptcy protection. Here are the alarming signs:

1. Its price/book ratio was 0.39. Such a low price/book ratio often suggests the market is discounting the asset value of the company, suggesting the likely risk in the company in general.

2. The company had a net income of $-198.52 million and EBITDA of $10.69 million on revenue of $2.31 billion. The company had $114.99 million cash on its balance sheet. Its debt burden was $443.58 million. The net debt minus cash was a little over $300 million, but the company had EBITDA of only $11 million. Even at today's low interest rate, it is not hard to figure out Patriot Coal was either going to raise cash, or to go bust.

3. This month, 25.48 million shares were being shorted. The short ratio of Patriot Coal is 2.10, accounting for 28.00% of floating shares. Again, this shows the market's lack of confidence in this company.

Using similar criteria, we can rate the other major coal companies.

Arch Coal Inc. (ACI) has a market cap of $1.30 billion. Its price/book ratio is 0.40. Such a low price/book ratio often suggests the market is discounting the asset value of the company. Arch Coal had a net income of $87.29 million and EBITDA of $901.08 million on revenue of $4.45 billion. Its revenue grew by 19.10%, and its net income declined by 97.80% during the most recent quarter. The company has $117.77 million cash on its balance sheet. Its debt burden is $4.07 billion. Comparing the EBITDA ($901.08 million) and net debt (~ $4 billion), Arch Coal doesn't yet have a problem of covering its debt interest. But liquidity can be an issue if EBITDA further deteriorates. This month, 31.10 million shares are being shorted. The short ratio of Arch Coal Inc. is 2.40, accounting for 19.20% of floating shares. The market sentiment is very negative about Arch Coal as well.

Alpha Natural Resources, Inc. (ANR) has a market cap of $1.65 billion. Its price/book ratio is 0.27. The company had a net income of $-756.35 million and EBITDA of $1.31 billion on revenue of $7.79 billion. The company has $588.90 million cash on its balance sheet. Its debt burden is $2.97 billion. The trading volume has been stable recently. This month, 20.28 million shares are being shorted. The short ratio of Alpha Natural Resources Inc. is 1.30, accounting for 10.50% of floating shares. Alpha Natural Resources is in decent shape financially. The possibility of bankruptcy is remote in the near term.

Peabody Energy Corp. (BTU) has a market cap of $6.11 billion. Its price/book ratio is 1.24. Its operating margin of 20.27% is much healthier than the other coal companies. If there is one survivor in this business, it is Peabody. The company had a net income of $1 billion and EBITDA of $2.2 billion on revenue of $8.27 billion. Its revenue grew by 17.00%, and its net income declined by 2.20% during the most recent quarter. The company has $952.40 million cash on its balance sheet. Its debt burden is $6.65 billion. Its operating cash flow was $1.81 billion, and its free cash flow was $142.91 million. The trading volume has been stable recently. This month, 7.84 million shares are being shorted. The short ratio of Peabody Energy is 0.90, accounting for 3.20% of floating shares.

James River Coal Co. (JRCC) has a market cap of $75 million. Its price/book ratio is 0.26, even lower than Arch Coal. The company had a net income of $-47.14 million and EBITDA of $153.43 million on revenue of $1.32 billion. The company has $169.38 million cash on its balance sheet. Its debt burden is $585.80 million. Again comparing its EBITDA and net debt, liquidity is not yet an issue. This month, 12.34 million shares are being shorted. The short ratio of James River Coal Co. is 5.50, accounting for 47.00% of floating shares. The market seems all but decided that James River can go bankrupt any time.

Westmoreland Coal Co. (WLB) has a market cap of $125.88 million. Westmoreland Coal had a net income of $-17.34 million and EBITDA of $77.63 million on revenue of $519.84 million. The company has $50.11 million cash on its balance sheet. Its debt burden is $396.50 million. Its EBITDA/net debt ratio is similar to that of Arch Coal. This month, 0.51 million shares are being shorted. The short ratio of Westmoreland Coal Co. is 18.80, accounting for 4.80% of floating shares. This appears to safest coal stock among the pack.

In summary, for investment safety, Peabody > Westmoreland > Alpha Natural Resources > Arch Coal > James River. James River will almost surely file for bankruptcy protection soon, in order to stay competitive after Patriot Coal gone bust. Considering risk and return, Alpha Natural Resources and Arch Coal are perhaps the best on this list.

Source: Which Coal Miner Is The Next To Bankruptcy Protection?