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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as BlueScope Steel Limited (ASX:BSL), with a market cap of AU$6.2b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at BSL’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 BlueScope Steel's financial health, so you should conduct further analysis into BSL here.
BSL’s Debt (And Cash Flows)
BSL's debt levels have fallen from AU$1.1b to AU$930m over the last 12 months , which includes long-term debt. With this debt repayment, BSL's cash and short-term investments stands at AU$1.1b to keep the business going. Additionally, BSL has produced AU$1.4b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 154%, signalling that BSL’s operating cash is sufficient to cover its debt.
Can BSL meet its short-term obligations with the cash in hand?
With current liabilities at AU$2.5b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.89x. The current ratio is the number you get when you divide current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does BSL face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 13%, BSL's debt level may be seen as prudent. This range is considered safe as BSL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether BSL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BSL's, case, the ratio of 20.66x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
BSL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, 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 BSL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research BlueScope Steel to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BSL’s future growth? Take a look at our free research report of analyst consensus for BSL’s outlook.
- Valuation: What is BSL 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 BSL is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.