These 4 Measures Indicate That Worthington Steel (NYSE:WS) Is Using Debt Safely

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.' 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. As with many other companies Worthington Steel, Inc. (NYSE:WS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 Worthington Steel

How Much Debt Does Worthington Steel Carry?

The image below, which you can click on for greater detail, shows that at November 2023 Worthington Steel had debt of US$195.0m, up from US$22.8m in one year. But it also has US$214.4m in cash to offset that, meaning it has US$19.4m net cash.

How Healthy Is Worthington Steel's Balance Sheet?

According to the last reported balance sheet, Worthington Steel had liabilities of US$595.3m due within 12 months, and liabilities of US$130.6m due beyond 12 months. On the other hand, it had cash of US$214.4m and US$428.2m worth of receivables due within a year. So it has liabilities totalling US$83.3m more than its cash and near-term receivables, combined.

Of course, Worthington Steel has a market capitalization of US$1.53b, 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. Despite its noteworthy liabilities, Worthington Steel boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Worthington Steel has increased its EBIT by 9.2% over twelve months, which should ease any concerns about debt repayment. 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 Worthington Steel can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Worthington 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, Worthington Steel produced sturdy free cash flow equating to 79% 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

We could understand if investors are concerned about Worthington Steel's liabilities, but we can be reassured by the fact it has has net cash of US$19.4m. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in US$261m. So is Worthington Steel's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Worthington Steel (1 is concerning) 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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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.