Stock Analysis

Does ArcelorMittal (AMS:MT) Have A Healthy Balance Sheet?

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that ArcelorMittal S.A. (AMS:MT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

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How Much Debt Does ArcelorMittal Carry?

The image below, which you can click on for greater detail, shows that at September 2022 ArcelorMittal had debt of US$8.99b, up from US$8.25b in one year. On the flip side, it has US$5.07b in cash leading to net debt of about US$3.93b.

ENXTAM:MT Debt to Equity History November 13th 2022

A Look At ArcelorMittal's Liabilities

According to the last reported balance sheet, ArcelorMittal had liabilities of US$22.5b due within 12 months, and liabilities of US$14.8b due beyond 12 months. Offsetting this, it had US$5.07b in cash and US$4.68b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$27.6b.

Given this deficit is actually higher than the company's massive market capitalization of US$22.0b, we think shareholders really should watch ArcelorMittal's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

ArcelorMittal has a low net debt to EBITDA ratio of only 0.22. And its EBIT covers its interest expense a whopping 79.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, ArcelorMittal grew its EBIT by 2.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ArcelorMittal'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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, ArcelorMittal recorded free cash flow worth 51% 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.

Our View

We feel some trepidation about ArcelorMittal's difficulty level of total liabilities, but we've got positives to focus on, too. To wit both its interest cover and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that ArcelorMittal is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - ArcelorMittal has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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