Stocks with market capitalization between $2B and $10B, such as BlueScope Steel Limited (ASX:BSL) with a size of AUD A$7.13B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for BlueScope Steel

Can BSL service its debt comfortably?

A substantially higher debt poses a significant threat to a company’s profitability during a downturn. BSL’s debt-to-equity ratio stands at 17.79%, which indicates that its debt is at an acceptable level. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. BSL’s interest on debt is sufficiently covered by earnings as it sits at around 14.84x. Debtors may be willing to loan the company more money, giving BSL ample headroom to grow its debt facilities.

Can BSL pay its short-term liabilities?

Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. In order to measure liquidity, we must compare BSL’s current assets with its upcoming liabilities. Our analysis shows that BSL does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Next Steps:

Are you a shareholder? BSL’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Since BSL’s financial situation may change, I suggest examining market expectations for BSL’s future growth on our free analysis platform.

Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. BSL’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.