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Reasons to Watch U.S. Steel’s Working Capital

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Aug. 12 2015, Updated 11:05 a.m. ET

U.S. Steel’s working capital

Previously in this series, we explored U.S. Steel Corporation’s (X) plans to realize substantial cost savings by properly managing its supply chain. Now, we’ll look at some tangible measures that U.S. Steel is taking to reduce its working capital. Working capital is the capital a company uses in its day-to-day operations. It can be defined as current assets minus current liabilities.

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Working capital management is crucial

Companies have to invest capital toward their working capital. Generally, this capital is in the form of short-term loans. These loans have interest costs attached to them. As a result, a company’s interest expenses increase if it has more working capital.

Working capital management is crucial for steel companies including ArcelorMittal (MT) and Nucor (NUE).

Nucor currently forms 5.23% of the SPDR S&P Metals and Mining ETF (XME) and 2.65% of the Materials Select Sector SPDR ETF (XLB).

Cash conversion cycle

The cash conversion cycle measures a company’s working capital in numbers of days. Cash is used in inventory and receivables, and payables act as a source of funds. The cash conversion cycle tells us how many days of cash is tied up in a company’s operations before it’s converted to cash again.

The previous chart shows U.S. Steel’s cash conversion cycle. As you can see, it fell in 2Q15. A decline in DPO (days payable outstanding) has been the biggest reason for the fall in U.S. Steel’s cash conversion cycle. Lower DPO means that U.S. Steel is taking more time to pay its suppliers. This helps U.S. Steel control its cash outflow. Working capital was a net contributor to U.S. Steel’s 2Q15 cash flow.

What other factors contributed to U.S. Steel’s 2Q15 cash flow? We’ll find out in our next part.

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