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What Investors Should Know About Reliance Steel & Aluminum Co’s (NYSE:RS) Financial Strength

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Reliance Steel & Aluminum Co (NYSE:RS), with a market cap of US$6.30b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine RS’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RS here.

Check out our latest analysis for Reliance Steel & Aluminum

How much cash does RS generate through its operations?

RS’s debt level has been constant at around US$2.04b over the previous year – this includes both the current and long-term debt. At this stable level of debt, RS currently has US$124.3m remaining in cash and short-term investments for investing into the business. Additionally, RS has produced cash from operations of US$480.8m in the last twelve months, resulting in an operating cash to total debt ratio of 23.6%, meaning that RS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RS’s case, it is able to generate 0.24x cash from its debt capital.

Does RS’s liquid assets cover its short-term commitments?

Looking at RS’s most recent US$899.4m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$3.65b, with a current ratio of 4.06x. However, anything about 3x may be excessive, since RS may be leaving too much capital in low-earning investments.

NYSE:RS Historical Debt September 6th 18
NYSE:RS Historical Debt September 6th 18

Does RS face the risk of succumbing to its debt-load?

RS is a relatively highly levered company with a debt-to-equity of 40.9%. 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 RS’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 RS, the ratio of 11.08x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as RS’s high interest coverage is seen as responsible and safe practice.

Next Steps:

At its current level of cash flow coverage, RS has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how RS has been performing in the past. I suggest you continue to research Reliance Steel & Aluminum to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for RS’s future growth? Take a look at our free research report of analyst consensus for RS’s outlook.

  2. Valuation: What is RS 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 RS 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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