Is ArcelorMittal (AMS:MT) taking on too much debt?

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.” It’s only natural to consider a company’s balance sheet when you check how risky it is, as debt is often involved in a company collapse. What is important is ArcelorMittal SA (AMS:MT) carries debt. But should shareholders be concerned about the use of debt?

What risk does debt bring with it?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive price. A key component of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. Of course, many companies use debt to finance their growth without any negative consequences. When we examine debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for ArcelorMittal

How much is ArcelorMittal’s net debt?

You can click on the graphic below to see the historical numbers. However, it shows that ArcelorMittal had $11.3 billion in debt as of September 2024, up from $10.5 billion in a year. However, this compares to US$5.09 billion in cash, leading to net debt of about US$6.17 billion.

How healthy is ArcelorMittal’s balance sheet?

The latest balance sheet data shows that ArcelorMittal had liabilities of US$21.3b falling due within a year, and liabilities of US$16.5b falling due after that. On the other hand, it had cash of US$5.09b and US$4.24b worth of receivables due within a year. So its liabilities total US$28.5b more than its cash and short-term receivables combined.

Given that this deficit is actually higher than the company’s massive market capitalization of US$19.9 billion, we think shareholders should really pay attention to ArcelorMittal’s debt, like a parent watching their child for the first time Watching cycling. Hypothetically, extremely heavy dilution would be required if the company were forced to pay off its debt by raising capital at the current share price.

To measure a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). We take into account both the absolute amount of the debt and the interest paid on it.

ArcelorMittal has a low net debt to EBITDA ratio of just 1.5. And its EBIT covers interest expenses 21.1 times. So we’re pretty relaxed when it comes to dealing with debt in an extremely conservative manner. The low debt load could be crucial for ArcelorMittal if management can’t prevent a repeat of last year’s 66% EBIT cut. As a company’s profits decline, relationships with its lenders can sometimes deteriorate. When analyzing debt levels, the balance sheet is the obvious place to start. Ultimately, however, the company’s future profitability will determine whether ArcelorMittal 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.

But our final consideration is also important, because a company cannot pay off its debts with paper profits; it takes cash. So we always check how much of that EBIT is converted into free cash flow. Over the last three years, ArcelorMittal generated stable free cash flow equal to 55% of its EBIT, which is about in line with our expectations. That ready cash means it can pay down its debt whenever it wants.

Our view

At first glance, ArcelorMittal’s total liabilities make us uncertain about the stock, and its EBIT growth rate was no more enticing than that one empty restaurant on the busiest night of the year. But at least the company manages quite well to cover its interest expenses with its EBIT; that is encouraging. Looking at the bigger picture, it seems clear to us that ArcelorMittal’s use of debt creates risks for the company. If all goes well, it might pay off, but the downside of this debt is a greater risk of permanent loss. Even though ArcelorMittal lost money on the bottom line, its positive EBIT suggests that the company itself has potential. So you might want to find out how earnings have performed over the last few years.

Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.