Overview: Steel Dynamics (Part 10 of 11)
Financial impact of the Columbus acquistion
Having a strong balance sheet is important for any company. A strong balance sheet means having comfortable leverage and liquidity ratios. Healthy cash flows and asset quality also reflect the balance sheet strength.
Steel Dynamics has a mix of steel mines and metal recycling facilities. Most of the mines and facilities are new. They represent strong assets on its balance sheet.
In this part of the series, we’ll analyze its leverage and liquidity ratios. It’s important to note that Moody’s has a Ba1 rating on Steel Dynamics. This ranks Steel Dynamics in the bottom of the investment grade.
Steel Dynamics has comfortable leverage ratio
The chart above shows the debt ratios for Steel Dynamics (STLD). As you can see the debt-to-equity ratio is at 60%. This means that Steel Dynamics has $1 of equity capital for every $0.6 of debt it owes. The net debt-to-earnings before interest, taxes, depreciation, and amortization (or EBITDA) ratio has also been steadily improving. It stood at 2.1 at the end 2Q14. This represents a cushion for the company. It gives the company room to pursue growth opportunities.
Columbus acquisition impacts credit ratios
Steel Dynamics debt will increase by more than $1 billion after this transaction. Moody’s expects the deal to be credit negative for Steel Dynamics. We have seen earlier that Steel Dynamics has comfortable debt ratios. Although the deal is positive for Steel Dynamics investors, it increases the risk through increased leverage.
Maintaining comfortable leverage ratios is a key issue for steel makers like ArcelorMittal (MT), U.S. Steel Corporation (X), and Nucor Corporation (NUE). Investors in the SPDR S&P Metals and Mining ETF (XME) should also keep a close eye on this ratio.
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