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Are AK Steel’s 2Q15 Cash Flow Improvements Sustainable?


Aug. 7 2015, Updated 11:06 p.m. ET

AK Steel’s cash flows

Previously, we discussed that AK Steel’s (AKS) leverage ratios have improved slightly in 2Q15. Along with higher leverage ratios, AK Steel has grappled with negative cash flows for the last several quarters. The deadly duo of high leverage and low cash flows is exemplified in its stock market performance as well. AK Steel’s share price fell very steeply this year as compared to its peers like Nucor (NUE), ArcelorMittal (MT), and U.S. Steel (X). AK Steel has also underperformed in comparison to the SPDR S&P Metals and Mining ETF (XME) since the beginning of 2015.

Investors like to stay away from companies with high leverage ratios when market conditions turn unfavorable.

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Types of cash flows

For any enterprise, cash flows come from operating, investing, or financing. Raising cash through the issue of debt comes under financing activities. On the other hand, cash flows from disposal, or purchase of fixed assets, falls under investing activities. Out of the three forms of cash flows, operating cash flows are the most important for a company. The previous chart shows AK Steel’s operating cash flows.

Operating cash flows

Operating cash flows represent the cash flows that the core operations of a company generate. One of the issues that AK Steel was facing is its negative operating cash flows. However, AK Steel has generated positive operating cash flows for the last two quarters.

Positive operating cash flows helped AK Steel become free cash flow positive in the first half of 2015. This is an encouraging sign for AK Steel investors. Solid performance on the cash flows front is a possible reason behind the spurt in AK Steel’s share price after its 2Q15 earnings release.

In the next part of the series we’ll discuss the other factors that contributed to AK Steel’s 2Q15 cash flows.


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