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We Think AK Steel Holding (NYSE:AKS) Is Taking Some Risk With Its Debt

We Think AK Steel Holding (NYSE:AKS) Is Taking Some Risk With Its Debt


News is brought to you by Mr. Shailesh Karia


Published on 9th September, 2019


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.` So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies AK Steel Holding Corporation (NYSE:AKS) makes use of debt. But should shareholders be worried about its use of debt?


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. 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.


How Much Debt Does AK Steel Holding Carry?


As you can see below, AK Steel Holding had US$1.95b of debt at June 2019, down from US$2.04b a year prior. However, it also had US$42.2m in cash, and so its net debt is US$1.90b.


How Healthy Is AK Steel Holding`s Balance Sheet?


According to the last reported balance sheet, AK Steel Holding had liabilities of US$1.07b due within 12 months, and liabilities of US$3.14b due beyond 12 months. Offsetting these obligations, it had cash of US$42.2m as well as receivables valued at US$675.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.49b.


The deficiency here weighs heavily on the US$724.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, AK Steel Holding would likely require a major re-capitalisation if it had to pay its creditors today.


We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.


We`d go so far as to say AK Steel Holding`s level of total liabilities was disappointing. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Overall, we think it`s fair to say that AK Steel Holding has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. Given our hesitation about the stock, it would be good to know if AK Steel Holding insiders have sold any shares recently. You click here to find out if insiders have sold recently.


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.


We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.


If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading. 


Source : https://finance.yahoo.com//


 





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