Over the past few weeks I have been watching the recent developments of the Steel & Iron industry. This has provided an excellent opportunity to search for stocks in this sector for investment purposes. One company I think is very interesting to analyze is ArcelorMittal (MT). While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze ArcelorMittal's total debt, total liabilities, debt ratios and what analyst and other top investors believe about this company. From this analysis we should get an idea if the company is highly leveraged and how much to expect in return for investing in this company over the long term.
It is essential to remark that gaining knowledge about ArcelorMittal's debt and liabilities is a key component in understanding the risk of investing in this company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. By studying the debt part of ArcelorMittal, the investor can understand if the ArcelorMittal is able to keep its capital and use it for growth in the future.
Debt Ratios
Total Debt to Total Assets Ratio
This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.
ArcelorMittal's total debt to total assets ratio has increased over the past three years from 0.19 to 0.22. As the total debt to total assets ratio has increased, this indicates that since 2010, ArcelorMittal has added more total debt value than total asset. This is not a good signal for bond investors.
As the number is currently well below 1, this indicates that ArcelorMittal has more assets than total debt. Because this number is extremely low (0.22), this metric indicates very low financial risk to the company.
Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.
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