Why AK Steel Still Has a Balance Sheet Problem



Balance sheet

Steel stocks saw their leverage ratios get worse in 1Q16. However, we’ve come a long way since then. Not only have the earnings improved, some companies raised equity to strengthen their balance sheets. Having said that, some steel companies’ balance sheets still don’t look comfortable. In this part, we’ll look at the market capitalization-to-net debt ratio. The net debt is from the 2Q17 filings and the market capitalization is based on the closing prices on August 18.

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Comparative analysis

Nucor (NUE) and Steel Dynamics have healthy market capitalization-to-net debt ratios, as you can see in the above chart. ArcelorMittal’s (MT) market capitalization is 2.2x its net debt, which looks somewhat on the higher side.

U.S. Steel’s (X) market capitalization is 3x its net debt, while AK Steel’s market capitalization is 1.1x its net debt. In the past, both of these companies faced a situation where their debt was much higher than their market capitalization. In 2015, AK Steel’s total outstanding debt was more than 6x its market capitalization.

AK Steel

AK Steel’s (AKS) current market capitalization-to-net debt ratio is the lowest in our coverage of steel stocks (CLF). We haven’t considered the underfunded pension and OPEB (other post-employment benefits) yet. As of December 31, 2016, AK Steel had an underfunded pension and OPEB liability of $1.1 billion, while U.S. Steel’s pension and OPEB plans were underfunded by $1.2 billion.

AK Steel’s financial position looks weak if we consider its debt and other liabilities—compared to its market capitalization. Although the company has taken some measures to address its leverage ratios, the balance sheet still can’t be called “healthy.”

In the next part, we’ll look at steel companies’ financial leverage.


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