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Why Reliance Steel & Aluminum has a strong balance sheet

Mohit Oberoi

Must-know: An overview of Reliance Steel & Aluminum (Part 5 of 9)

(Continued from Part 4)

Reliance Steel’s balance sheet

After looking at Reliance Steel & Aluminum’s (RS) key financial metrics, we’ll take a look at its balance sheet. To measure a company’s balance sheet strength, you need to look at the company’s financial leverage. Lower leverage ratios let a company to better cope with any sudden downturn in its business. For a company like Reliance Steel, which makes a lot of strategic acquisitions, a strong balance sheet with lower leverage ratios is very important.

We’ll analyze the leverage ratios of Reliance Steel by looking at the metrics listed below.

Leverage indicators for Reliance Steel

  • Interest coverage ratio: This ratio is the earnings before interest, tax, depreciation, and amortization (or EBITDA) divided by the company’s interest expense. The ratio is used to get a sense of the company’s debt repayment capacity. As you can see in the chart above, as of the end of March 2014, the ratio stood at 7.6. This means that the EBITDA is 7.6 times the annual interest expense. This ratio is pretty healthy, compared to Reliance Steel’s peers in the steel industry.
  • Net debt-to-capital ratio: The ratio stands at 33.8% as of March 2014. This means that debt forms around a third of the company’s total capital, with the remaining being shareholder equity. This provides an adequate cushion to Reliance Steel investors.

It’s important to note that Reliance Steel almost doubled its debt last year for a strategic acquisition. So these ratios would have looked even better without that debt. We’ll discuss Reliance Steel’s acquisition strategy in the next part of this series.

While taking more debt helps a company to pursue an aggressive growth strategy, debt can create a payment crisis for the company during slowdowns. A lot of steel companies like ArcelorMittal (MT) and United States Steel Corporation (X) are reeling under the impact of high leverage. An alternate way to access the steel industry is through Nucor Corporation (NUE) and the SPDR S&P Metals and Mining ETF (XME).

Continue to Part 6

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