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AK Steel’s Leverage Ratios: Quite High but Not Uncomfortably So

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AK Steel’s leverage ratios

There are several metrics we can look at to analyze a company’s leverage ratios. One criterion for comparing a company’s leverage metrics is its debt-to-current-market capitalization. AK Steel’s (AKS) debt is currently six times its current market capitalization. The company’s leverage ratios look even scarier if you look at its debt-to-capital ratio, which is ~120%.

However, that’s only one part of AK Steel’s leverage ratios. There are two things that investors should currently be looking at:

  1. Is the company able to make regular interest payments?
  2. Does the company face near-term debt maturities?
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Interest coverage

We can define interest coverage ratio as a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) divided by its interest expense. Interest coverage ratio measures a company’s ability to make interest payments. AK Steel’s (AKS) interest coverage ratio at the end of 3Q15 was 2.8. This not high compared to other companies in this space.

Debt maturity

AK Steel doesn’t face any major debt maturity until the end of 2018. It would have been a real challenge for AK Steel to roll over or refinance its debt under the current market scenario. In contrast, ArcelorMittal (MT) and United States Steel (X) face significant near-term debt maturities.

In October, Moody’s placed several steel companies’ ratings under review. While Moody’s has cut ArcelorMittal and United States Steel’s rating by one, it has maintained AK Steel’s credit rating. Having said that, AK Steel has the lowest credit rating among major US steel companies. It’s important to note that Nucor (NUE) is the only US steel company that carries an investment grade (BND) credit rating.

In the next part, we’ll explore how AK Steel’s cash flows could shape up in 2016.

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