David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 United States Steel Corporation (NYSE:X) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. 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.
What Is United States Steel's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 United States Steel had US$4.80b of debt, an increase on US$2.51b, over one year. However, it does have US$1.70b in cash offsetting this, leading to net debt of about US$3.11b.
How Healthy Is United States Steel's Balance Sheet?
According to the last reported balance sheet, United States Steel had liabilities of US$2.46b due within 12 months, and liabilities of US$5.76b due beyond 12 months. Offsetting this, it had US$1.70b in cash and US$1.09b in receivables that were due within 12 months. So its liabilities total US$5.44b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$3.13b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, United States Steel would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if United States Steel 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.
In the last year United States Steel had a loss before interest and tax, and actually shrunk its revenue by 27%, to US$10b. To be frank that doesn't bode well.
While United States Steel's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$850m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$728m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for United States Steel you should be aware of.
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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