A challenging market
Steel market conditions have been quite challenging in 2015. Steel prices have crashed globally, largely due to an overwhelming increase in Chinese steel exports. On top of that, there looks to be no easy or early solution to the recent Chinese slowdown, which may mean that the steel and iron ore industry will continue to be under pressure for an extended period of time.
However, companies with strong balance sheets could still outperform their peers amid such challenging steel market conditions. In this part of our series on Nucor Corporation’s (NUE) performance during the steel industry slowdown, we’ll explore different steel companies’ financial strengths.
Net debt to EBITDA
Net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of a company’s leverage. As the graph above shows, Nucor, the largest steel company in the US, has the lowest net debt to EBITDA among all the major steel producers.
AK Steel Holding Corporation (AKS) has one of the highest leverage ratios in the steel industry. Steel Dynamics’ (STLD) leverage ratios also went up last year, after its acquisition of Severstal’s (CHMF) Columbus plant.
Interest coverage ratio
You can define interest coverage ratio as a company’s EBITDA divided by its interest expense. Interest coverage ratio measures a company’s ability to make interest payments, and at 10.02 as of the end of 2Q15—much higher than most other listed steel companies—Nucor’s interest coverage ratio looks quite healthy.
Perhaps this figure helps explain why Nucor is the only North American steel company to hold an investment-grade credit rating. Nucor’s financial strength, coupled with its higher profit margins, may also better prepare the company to cope with any further weaknesses in steel markets.
Nucor’s financial strength also provides the company with financial flexibility, and it can utilize the cash on its balance sheet to enhance shareholder value. This potential, as we discussed previously in this series, has already led Nucor to announce a share buyback program of up to $900 million.
Nucor could also look at more strategic acquisitions, or it could invest excess cash to grow the business organically. However, for now, the company has chosen to play it safe and return the excess cash back to shareholders.
Companies normally buy back their shares when they perceive the shares to be undervalued. In the next part of this series, we’ll explore Nucor’s valuation multiples.