Yahoo Finance Here's Why Stelco Holdings (TSE:STLC) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Stelco Holdings Inc. (TSE:STLC) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Stelco Holdings
How Much Debt Does Stelco Holdings Carry?
The chart below, which you can click on for greater detail, shows that Stelco Holdings had CA$498.0m in debt in December 2021; about the same as the year before. But on the other hand it also has CA$957.0m in cash, leading to a CA$459.0m net cash position.
A Look At Stelco Holdings' Liabilities
The latest balance sheet data shows that Stelco Holdings had liabilities of CA$1.26b due within a year, and liabilities of CA$541.0m falling due after that. Offsetting these obligations, it had cash of CA$957.0m as well as receivables valued at CA$412.0m due within 12 months. So its liabilities total CA$430.0m more than the combination of its cash and short-term receivables.
Given Stelco Holdings has a market capitalization of CA$3.60b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Stelco Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although Stelco Holdings made a loss at the EBIT level, last year, it was also good to see that it generated CA$1.9b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Stelco Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Stelco Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent year, Stelco Holdings recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While Stelco Holdings does have more liabilities than liquid assets, it also has net cash of CA$459.0m. And it impressed us with free cash flow of CA$1.4b, being 74% of its EBIT. So we don't think Stelco Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Stelco Holdings (2 make us uncomfortable!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
