Mid-caps stocks, like United States Steel Corporation (NYSE:X) with a market capitalization of USD $4.95 Billion, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups, primarily due to seasoned executives running a lean corporate structure. With higher returns, they have also demonstrated increased volatility compared to the large-caps, a key reason being their weaker financial health. X’s debt-to-equity ratio of 133.2% doesn’t meet my criteria of a financially strong company. But a clearer picture would only emerge once we also consider its current assets (including cash) and earnings. View our latest analysis for United States Steel
Does United States Steel have enough cash compared to its debt?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay investors’ fear of a debt overhang. To assess that, I compare United States Steel’s cash and other liquid assets (current assets) against its overall debt. X’s short-term assets ($4.36 Billion) cover its total debt ($3.03 Billion). Investors should not be worried about its debt to equity ratio. The company can easily cover its debt in a very short-time span if it’s faced with some unforeseen operating environment.
Are X’s earnings squeezed by its debt-obligations?
A different way of looking at financial health is to compare X’s earnings and interest-obligations. While both these numbers are taken from the income statement, they are important in understanding a company’s financial condition.I consider an earnings to interest expense multiple of more than five an indication of financial strength as the company can easily meet its debt obligations, even during a tough time. For X, the company is making a loss, therefore interest on debt is not well covered by earnings.
Apart from exceeding my benchmark debt-to-equity ratio, United States Steel’s earnings also don’t stack up against interest cost as strongly as I would like. However, the company has enough current assets to manage its debt, but whether it can continue to be in this position depends on its operating cash flows (20% of total debt is generally an acceptable amount).
Now that you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on United States Steel to see what are X’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in United States Steel anymore, you can use our free platform to see my list of over 100 other stocks with a high growth potential.