Stock Analysis

ArcelorMittal South Africa (JSE:ACL) Has Debt But No Earnings; Should You Worry?

JSE:ACL
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies ArcelorMittal South Africa Ltd (JSE:ACL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ArcelorMittal South Africa

What Is ArcelorMittal South Africa's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 ArcelorMittal South Africa had R7.31b of debt, an increase on R3.06b, over one year. However, it does have R3.61b in cash offsetting this, leading to net debt of about R3.70b.

debt-equity-history-analysis
JSE:ACL Debt to Equity History December 21st 2020

A Look At ArcelorMittal South Africa's Liabilities

The latest balance sheet data shows that ArcelorMittal South Africa had liabilities of R12.2b due within a year, and liabilities of R8.91b falling due after that. Offsetting these obligations, it had cash of R3.61b as well as receivables valued at R2.48b due within 12 months. So its liabilities total R15.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R1.22b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, ArcelorMittal South Africa would likely require a major re-capitalisation if it had to pay its creditors today. 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 ArcelorMittal South Africa 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, ArcelorMittal South Africa made a loss at the EBIT level, and saw its revenue drop to R32b, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While ArcelorMittal South Africa's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping R3.7b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated R410m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with ArcelorMittal South Africa , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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