Why is the credit rating important?
The relevance of the credit rating for an equity investor is debatable. The metric is commonly used by investors in debt instruments. The argument is partially correct. The credit rating is a key metric for debt investors, but it’s also an indicator of the health of a company. A company that is doing well enjoys a good credit rating while a company facing challenges has a lower credit rating. It’s also linked to the interest costs because a company with a higher rating is able to borrow at a lower rates, which increases its profitability. It also reflects the riskiness of a company because a lower credit rating represents the higher risk associated with the company.
What is the credit rating for Nucor?
Nucor has a rating of “A” from Standard & Poor’s. There’s no other major steel company that enjoys such high ratings. This shouldn’t be a surprise because the outlook for the sector hasn’t been positive. The sector has been marred by issues like lower selling prices, lower capacity utilization, and high interest burdens. As a result, most of the companies haven’t been making profits. They have a lower rating assigned by the rating agencies.
Why does Nucor enjoys high credit ratings?
Credit rating agencies have stringent and well defined standards for assigning ratings. Fundamentally, they look at the industry the company is operating in, its financial position, leverage, and ultimately its ability to pay back the borrowed money. We compare Nucor to its peers in the U.S. on its leverage and liquidity ratios. For leverage we look at net debt to earnings before interest, taxes, depreciation, and amortization (or EBITDA), which indicates the level of debt compared to the earnings of the company. For liquidity we look at the current ratio which is simply the current assets to current liability. A company needs to maintain optimum leverage and liquidity ratios. As you can see in the previous chart, Nucor has the lowest leverage and comfortable liquidity ratios compared to its peers. This means lower risk for Nucor’s investors compared to other steel companies.
Liquidity and leverage are two important metrics that investors in Nucor (NUE), ArcelorMittal (MT), U.S. Steel Corporation (X), Reliance Steel & Aluminum (RS), and the SPDR S&P Metals and Mining ETF (XME) should be looking at.