Working capital management
In the previous part of this series, we looked at the pension and debt-related issues U.S. Steel Corporation (X) faced. Another issue the company faced was related to its working capital management. Working capital is the capital a company employs in its day-to-day operations. It can be defined as current assets minus current liabilities. Let’s see how U.S. Steel has performed on this metric.
U.S. Steel had higher working capital requirements
U.S. Steel Corporation’s (X) working capital was higher compared to other steel plays. It was paying its suppliers earlier than what its peers were doing. On the receivables side, it was taking more time to collect payment from its customers. Please be aware that every industry has different payment standards, and these standards vary among various industries.
Companies have to invest capital toward their working capital. Generally, this capital is in the form of short-term borrowings. These borrowings have interest costs attached to them. As a result, companies’ interest expenses increase if they have higher working capital.
U.S. Steel’s collection policy
The above chart shows the days sales outstanding of steel plays. Days sales outstanding (or DSO) can be defined as the average number of days a company takes to collect payment from its customers.
As you can see, U.S. Steel’s DSO was the highest compared to other steel plays. We have taken AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD) for comparison. Interestingly, barring U.S. Steel, other steel plays have quite similar DSOs.
Please be aware that the Standard and Poors depositary receipt (or SPDR) S&P Metals and Mining exchange-traded fund (or ETF) (XME) can also give you the desired exposure to the metals and mining industry.
Next, let’s look at the steps U.S. Steel Corporation (X) took to get back on track.