Is Algoma Steel Group (NASDAQ:ASTL) A Risky Investment?

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 Algoma Steel Group Inc. (NASDAQ:ASTL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Algoma Steel Group

How Much Debt Does Algoma Steel Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Algoma Steel Group had CA$618.8m of debt, an increase on CA$128.2m, over one year. However, it also had CA$493.4m in cash, and so its net debt is CA$125.4m.

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$392.6m due within 12 months and liabilities of CA$1.19b due beyond that. Offsetting these obligations, it had cash of CA$493.4m as well as receivables valued at CA$289.0m due within 12 months. So its liabilities total CA$797.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Algoma Steel Group is worth CA$1.39b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Algoma Steel Group 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.

Over 12 months, Algoma Steel Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Algoma Steel Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$29m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$326m of cash over the last year. 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 1 warning sign with Algoma Steel Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.