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Mid-caps stocks, like Steel Dynamics, Inc. (NASDAQ:STLD) with a market capitalization of US$6.9b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. STLD’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into STLD here.
STLD’s Debt (And Cash Flows)
STLD's debt levels surged from US$2.4b to US$2.5b over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$965m to keep the business going. Moreover, STLD has produced cash from operations of US$1.4b over the same time period, resulting in an operating cash to total debt ratio of 57%, signalling that STLD’s current level of operating cash is high enough to cover debt.
Can STLD pay its short-term liabilities?
At the current liabilities level of US$1.0b, it appears that the company has been able to meet these commitments with a current assets level of US$4.0b, leading to a 4.02x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is STLD’s debt level acceptable?
With a debt-to-equity ratio of 61%, STLD can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In STLD's case, the ratio of 16.6x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as STLD’s high interest coverage is seen as responsible and safe practice.
STLD’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around STLD's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for STLD's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Steel Dynamics to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STLD’s future growth? Take a look at our free research report of analyst consensus for STLD’s outlook.
- Valuation: What is STLD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether STLD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 firstname.lastname@example.org. 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.