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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that BlueScope Steel Limited (ASX:BSL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for BlueScope Steel

What Is BlueScope Steel's Debt?

As you can see below, BlueScope Steel had AU$244.8m of debt at June 2023, down from AU$777.2m a year prior. However, its balance sheet shows it holds AU$1.49b in cash, so it actually has AU$1.25b net cash.

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$3.47b due within 12 months and liabilities of AU$1.43b due beyond that. On the other hand, it had cash of AU$1.49b and AU$1.91b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$1.51b.

Since publicly traded BlueScope Steel shares are worth a total of AU$9.49b, it seems unlikely that this level of liabilities would be a major threat. 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.

The modesty of its debt load may become crucial for BlueScope Steel if management cannot prevent a repeat of the 60% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BlueScope Steel's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, BlueScope Steel recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While BlueScope Steel does have more liabilities than liquid assets, it also has net cash of AU$1.25b. So we are not troubled with BlueScope Steel's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with BlueScope Steel (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.