Does AK Steel Holding Corporation’s (NYSE:AKS) Debt Level Pose A Problem?
Stocks with market capitalization between $2B and $10B, such as AK Steel Holding Corporation (NYSE:AKS) with a size of $2.09B, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at AKS’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into AKS here. View our latest analysis for AK Steel Holding
Does AKS generate enough cash through operations?
AKS’s debt levels have fallen from $2,354.1M to $1,816.6M over the last 12 months – this includes both the current and long-term debt. With this debt payback, AKS currently has $173.2M remaining in cash and short-term investments , ready to deploy into the business. On top of this, AKS has generated $304.6M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 16.77%, indicating that AKS’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AKS’s case, it is able to generate 0.17x cash from its debt capital.
Can AKS meet its short-term obligations with the cash in hand?
With current liabilities at $865.3M, it seems that the business has been able to meet these obligations given the level of current assets of $1,823.7M, with a current ratio of 2.11x. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is AKS’s debt level acceptable?
Since total debt levels have outpaced equities, AKS is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if AKS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AKS, the ratio of 2.54x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
AKS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for AKS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AK Steel Holding to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for AKS’s future growth? Take a look at our free research report of analyst consensus for AKS’s outlook.
2. Valuation: What is AKS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AKS is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
