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Gauging U.S. Steel’s Financial Leverage in 2018

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Financial leverage

Previously in this series, we looked at leverage metrics like interest coverage and net debt to analyze steel companies’ financial leverage. Along with these ratios, analysts and especially credit rating agencies also look at the net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple. The ratio helps you gauge a company’s debt compared to its earnings capacity. In this part of our series, we’ll look at steel companies’ net debt-to-EBITDA ratios based on their TTM (trailing-12-month) adjusted EBITDA.

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Comparative analysis

Steel Dynamics (STLD) has the lowest net debt-to-TTM EBITDA of 0.96 in our coverage of steel stocks. Nucor’s (NUE) financial leverage is slightly higher than Steel Dynamics’, based on the net debt-to-TTM EBITDA multiple. AK Steel (AKS) has the highest financial leverage among the steel companies we’re covering in this series.

ArcelorMittal (MT) has a net debt-to-EBITDA multiple of 1.21x based on its TTM EBITDA. The company’s leverage ratios look comfortable, based on the metric. Notably, previously, the company was targeting a net debt to EBITDA ratio of 2 to reconsider its dividend program that was suspended in 2015. Now the company has reinstated its dividend, and it expects to pay dividends as a percentage of free cash flows once its net debt falls below $6 billion.

U.S. Steel

U.S. Steel Corporation (X) is generally perceived to have higher financial leverage. It has a net debt-to-EBITDA multiple of 1.06x, which looks pretty healthy. The company’s financial leverage has fallen for two reasons. Firstly, it has managed to generate healthy EBITDA in the last three quarters. Secondly, the company’s net debt levels have come down, as it’s holding sizeable cash on its balance sheet. Having said that, does it make sense for U.S. Steel to hold a significant amount of cash on its balance sheet? We’ll discuss this question in the next part of this series.

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