Steel market conditions have been quite challenging this year. Steel prices have crashed globally, largely due to an overwhelming increase in Chinese steel exports.
There looks to be no end in sight for the slowdown, which means that the steel and iron ore industry could continue to remain under pressure for an extended period of time. However, companies with strong balance sheets could still outperform amid challenging steel market conditions. In this article, we’ll explore different steel companies’ leverage ratios.
AK Steel has high leverage ratios
ArcelorMittal (MT) had a net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 2.55 as of the end of 2Q15. The company currently has a debt-to-market capitalization ratio of 2.1. AK Steel (AKS) has the highest leverage ratios, as can be seen in the graph above.
U.S. Steel Corporation (X) had a net debt to EBITDA ratio of 8.97 as of the end of 2Q15. Its debt-to-market capitalization ratio is also on the higher side. Currently, U.S. Steel forms 0.11% of the SPDR S&P MidCap 400 ETF (MDY).
Nucor has the lowest leverage ratios
Nucor had a net debt to EBITDA ratio of 1.38 as of June 30, 2015. Its debt-to-market capitalization is the lowest in our coverage universe. Nucor is the only North American steel company to carry an investment-grade credit rating. This is a reflection of its financial strength. Steel Dynamics (STLD) also has comfortable leverage ratios.
Nucor has the strongest balance sheet in our coverage of stocks. Nucor and Steel Dynamics have been the better-performing steel companies this year. AK Steel (AKS) and U.S. Steel’s higher leverage ratios are among the possible reasons why their share prices have fallen more than some other steel companies’ share prices.
Companies with high financial leverage could continue to witness volatility under the current market scenario. However, whenever steel market conditions turn around, these companies could see a sharp upturn.
In the next part, we’ll further explore the financial health of these steel companies.