Interest coverage ratio
In this part, we’ll look at different steel companies’ interest coverage ratios. An interest coverage ratio is a company’s EBITDA (earnings before interest, tax, depreciation, and amortization) divided by its interest expense. It measures a company’s ability to make interest payments. A higher ratio is associated with low financial leverage.
U.S. Steel (X) has an interest coverage ratio of 1.67x based on its 2016 EBITDA and 4.43x based on its 2017 consensus EBITDA. AK Steel’s (AKS) interest coverage ratio is 3.33x based on its fiscal 2017 EBITDA. ArcelorMittal (MT), the world’s biggest steelmaker, has an interest coverage ratio of 5.34x based on its fiscal 2016 EBITDA and 7.77x based on its fiscal 2017 consensus EBITDA.
Nucor and Steel Dynamics
Nucor (NUE) and Steel Dynamics (STLD) have high interest coverage ratios—compared to most of their peers. While Steel Dynamics has an interest coverage ratio of 7.92x based on its 2016 EBITDA, Nucor’s interest coverage ratio is 11.75x based on last year’s EBITDA. Notably, Nucor has the highest interest coverage ratio in our coverage of steel stocks. Nucor is the only North American steel company that carries an “investment grade” credit rating. Steel Dynamics and ArcelorMittal could also be strong candidates for a credit rating upgrade if steel market conditions continue to improve.
Along with the interest coverage ratio, we also need to look at some other ratios—for example, the DE (debt-to-equity) ratio. In the next part, we’ll provide a comparative analysis of steel companies’ DE equity ratios.