U.S. Steel balance sheet
U.S. Steel (X) had one of the weakest balance sheets compared to other steel companies like ArcelorMittal (MT), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS). It had high leverage ratios and was generating low cash flows. This is a dangerous combination for any enterprise. The balance sheet has improved to a great extent after the Carnegie Way program. Now, we’ll analyze the impact of this program on the U.S. Steel Corporation’s balance sheet.
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Improvement in liquidity ratios
Liquidity is a key metric for a steel company. In a cyclical industry with volatile cash flows, maintaining optimum liquidity is important to run the daily activity of business. It’s also important to have the opportunity to invest in profitable ventures. The liquidity ratio of U.S. Steel has been improving over the past few quarters. You can see this in the previous chart. Current liquidity of $3.2 billion also consists of cash and cash equivalents of $1.4 billion. Improvement in liquidity ratios is a positive signal for investors in U.S. Steel.
Reduction in net debt
Being capital intensive in nature, the steel industry is associated with high debt levels. U.S. Steel has one of the highest debt ratios compared to its peers. The high debt ratio increases the risk associated with investors of a company. It also increases the interest costs for the company and reduces its profitability. As part of the Carnegie Way program, U.S. Steel has been focusing on reducing its debt levels. The debt ratios have been improving as seen in the previous chart.
Rising cash flow from operations
The cash flows from operations have been rising steadily for U.S. Steel. This is a positive sign for U.S. Steel Corp.
Due to the improving balance sheet, U.S. Steel Corp. has seen improvement in its credit profile. It’s a welcome sign for the company’s debt and equity investors.
In the next section we’ll analyze the impact of the second quarter results on the share price of U.S. Steel. It’s important to note that an alternate way of accessing the steel industry is through the SPDR S&P Metals and Mining ETF (XME)