In this part of our series, we’ll look at different steel companies’ interest coverage ratios. We can define interest coverage ratios as a company’s EBIT (earnings before interest and tax) divided by its interest expenses. The ratio measures a company’s ability to make interest payments. A lower ratio is associated with high financial leverage.
AK Steel and U.S. Steel
AK Steel (AKS) has a trailing interest coverage ratio of 1.96. The company’s forward interest coverage ratio is 2.82. Notably, AK Steel’s forward interest coverage is the lowest among the steel companies we’re covering in this series.
However, looking at trailing data, we see that U.S. Steel Corporation (X) has the lowest interest coverage ratio of 1.68.
ArcelorMittal (MT), the world’s biggest steelmaker, has an interest coverage ratio of 8.6x, based on its fiscal 2018 consensus EBIT.
Steel Dynamics (STLD) has an interest coverage ratio of 7.9, based on its 2017 EBIT. The company’s interest coverage ratio is 10.4, based on 2018 expected EBIT.
Nucor (NUE) has the highest forward interest coverage ratio of 14.9x in our coverage of steel stocks. The company is the only North American steel company that carries an “investment grade” credit rating. ArcelorMittal is also working toward an investment-grade credit rating. The company is targeting a net debt level of $6 billion, which it believes “is an appropriate net debt target that will sustain investment grade metrics even at the low point of the cycle.”
Meanwhile, along with the interest coverage ratio, we should also look at the progression of net debt. In the next part of this series, we’ll see which steel companies managed to bring down their debt levels last year.