Stock Analysis

BlueScope Steel (ASX:BSL) Has A Pretty Healthy Balance Sheet

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ASX:BSL
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, BlueScope Steel Limited (ASX:BSL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BlueScope Steel

How Much Debt Does BlueScope Steel Carry?

The image below, which you can click on for greater detail, shows that BlueScope Steel had debt of AU$683.7m at the end of December 2020, a reduction from AU$804.7m over a year. However, it does have AU$1.50b in cash offsetting this, leading to net cash of AU$811.4m.

debt-equity-history-analysis
ASX:BSL Debt to Equity History May 24th 2021

How Healthy Is BlueScope Steel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BlueScope Steel had liabilities of AU$2.43b due within 12 months and liabilities of AU$1.79b due beyond that. On the other hand, it had cash of AU$1.50b and AU$1.04b worth of receivables due within a year. So it has liabilities totalling AU$1.68b more than its cash and near-term receivables, combined.

Of course, BlueScope Steel has a market capitalization of AU$10.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, BlueScope Steel also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that BlueScope Steel saw its EBIT decline by 7.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BlueScope Steel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. BlueScope Steel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, BlueScope Steel produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although BlueScope Steel's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$811.4m. And it impressed us with free cash flow of AU$543m, being 77% of its EBIT. So we don't have any problem with BlueScope Steel's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - BlueScope Steel has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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