In This Article:
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 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. We can see that BlueScope Steel Limited (ASX:BSL) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for BlueScope Steel
How Much Debt Does BlueScope Steel Carry?
You can click the graphic below for the historical numbers, but it shows that BlueScope Steel had AU$683.7m of debt in December 2020, down from AU$804.7m, one year before. But it also has AU$1.50b in cash to offset that, meaning it has AU$811.4m net cash.
A Look At BlueScope Steel's Liabilities
Zooming in on the latest balance sheet data, we can see that BlueScope Steel had liabilities of AU$2.43b due within 12 months and liabilities of AU$1.79b due beyond that. Offsetting these obligations, it had cash of AU$1.50b as well as receivables valued at AU$1.04b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$1.68b.
Of course, BlueScope Steel has a market capitalization of AU$10.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, BlueScope Steel boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that BlueScope Steel saw its EBIT decline by 7.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BlueScope Steel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.