Is ArcelorMittal South Africa (JSE:ACL) Using Debt Sensibly?

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. We can see that ArcelorMittal South Africa Limited (JSE:ACL) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

How Much Debt Does ArcelorMittal South Africa Carry?

The image below, which you can click on for greater detail, shows that at June 2025 ArcelorMittal South Africa had debt of R9.79b, up from R7.50b in one year. On the flip side, it has R3.93b in cash leading to net debt of about R5.85b.

A Look At ArcelorMittal South Africa's Liabilities

According to the last reported balance sheet, ArcelorMittal South Africa had liabilities of R17.6b due within 12 months, and liabilities of R8.38b due beyond 12 months. Offsetting this, it had R3.93b in cash and R3.77b in receivables that were due within 12 months. So its liabilities total R18.3b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R1.60b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, ArcelorMittal South Africa would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ArcelorMittal South Africa will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for ArcelorMittal South Africa

In the last year ArcelorMittal South Africa had a loss before interest and tax, and actually shrunk its revenue by 14%, to R35b. That's not what we would hope to see.

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 R3.8b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost R5.6b in the last year. So we think buying this stock is 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. For instance, we've identified 4 warning signs for ArcelorMittal South Africa (2 make us uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.