Here's Why Algoma Steel Group (NASDAQ:ASTL) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Algoma Steel Group Inc. (NASDAQ:ASTL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Algoma Steel Group

What Is Algoma Steel Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Algoma Steel Group had CA$617.8m of debt, an increase on CA$135.1m, over one year. However, it also had CA$452.0m in cash, and so its net debt is CA$165.8m.

How Healthy Is Algoma Steel Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Algoma Steel Group had liabilities of CA$480.8m due within 12 months and liabilities of CA$1.20b due beyond that. Offsetting these obligations, it had cash of CA$452.0m as well as receivables valued at CA$289.8m due within 12 months. So it has liabilities totalling CA$940.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$1.35b, so it does suggest shareholders should keep an eye on Algoma Steel Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Algoma Steel Group'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.

Over 12 months, Algoma Steel Group made a loss at the EBIT level, and saw its revenue drop to CA$2.5b, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

Not only did Algoma Steel Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$164m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$293m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 2 warning signs with Algoma Steel Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.