Please ensure Javascript is enabled for purposes of website accessibility

This Steel Maker’s Balance Sheet Still Needs Work

By Reuben Gregg Brewer – Updated May 11, 2019 at 11:09AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

AK Steel has made great strides during the current steel industry upturn, but that doesn't mean its work is finished.

AK Steel (AKS) is one of the largest steelmakers in the United States. It suffered badly during the long industry downturn that followed the 2007 to 2009 recession and took a huge toll on its balance sheet. The current industry upturn has lifted the company's results, however, and led to a balance sheet improvement -- but investors still need to keep a close eye on this particular financial statement. Here's why.

It got really bad

AK Steel lost money every year between 2009 and 2016. It was a brutal period of time during which the company's cumulative losses totaled more than $16 per share. A big portion of this red ink was driven by write-offs -- essentially, AK Steel took non-cash charges to reduce the value of long-term assets that were no longer expected to produce as much value as once believed.

A man in a steel factory standing next to pouring steel

Image source: Getty Images

Non-cash charges get pulled from shareholder equity, an important item on the balance sheet. This is where retained earnings reside, which is often one the largest components of shareholder equity. That, in turn, makes retained earnings an important component of a company's book value. Simplifying things a little bit, this is the money that a company made but wasn't distributed to shareholders.

The steep losses at AK Steel, driven by big non-cash charges, pushed the company's retained earnings deep into negative territory. By 2015 retained earnings were roughly negative $3.06 billion. That pushed stockholder equity to negative $980 million in 2015. That's a very bad number, suggesting that there would have been nothing left for shareholders if the company had closed up shop and liquidated its assets at that point.

AKS Chart

AKS data by YCharts

At the same time, AK Steel's long term debt had risen from around $600 million in 2009 to roughly $2.4 billion by the end of 2015. Rising debt and negative shareholder equity are a recipe for disaster -- you see them together on the balance sheets of companies that are heading to bankruptcy. So it's little wonder that AK Steel's stock, which once traded for around $70 a share, is currently trading hands at less than $3 per share.

Things are getting better

That's the bad news. But the company turned a profit of $0.02 a share in 2017 and $0.59 in 2018, so clearly its fortunes have reversed course. Steel is a highly cyclical industry, so this isn't an atypical pattern. What was different this time was the depth of the losses AK Steel experienced during the last downturn.

With positive earnings, however, AK Steel has been able to reduce the negative value of its retained earnings. That number has now fallen from a negative of just over $3 billion to roughly negative $2.7 billion (it's labeled "accumulated deficit" on the company's balance sheet, which is more descriptive). That improvement has allowed the company to report positive shareholder equity of around $95 million. Add in non-controlling interests, and the steel maker's total equity is around $430 million. Long-term debt, meanwhile, has held relatively steady at about $2 billion.

AKS Shareholders Equity (Quarterly) Chart

AKS Shareholders Equity (Quarterly) data by YCharts

All-in debt now makes up less than 100% of AK Steel's capital structure. At roughly 80% of the capital structure (which includes non-controlling interests), debt remains a huge issue for AK Steel and its shareholders. For comparison, long-term debt was roughly 35% of United States Steel's (X 0.48%) capital structure at the end of the first quarter, 38% at Steel Dynamics (STLD 3.14%), and 29% at industry leader Nucor (NUE 2.02%). Despite the improvement at AK Steel, it remains an outlier in the industry when it comes to the balance sheet.

Credit where credit is due

AK Steel's management team has made material improvement on the leverage front, notably by getting the company back into the black. Despite the changes, this stock isn't the best option for most investors looking at the steel industry because its balance sheet remains among the weakest in the sector. And while the earnings rebound throughout the industry is inspiring, it needs to be taken with a grain of salt because steel is a cyclical business. When the next downturn hits -- which will eventually happen -- AK Steel will be among the companies least capable of dealing with the impact because of the still relatively weak state of its balance sheet. It simply lacks the balance sheet flexibility that its peers have.

Reuben Gregg Brewer owns shares of Nucor. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nucor Corporation Stock Quote
Nucor Corporation
$106.92 (2.02%) $2.12
AK Steel Holding Corporation Stock Quote
AK Steel Holding Corporation
United States Steel Corporation Stock Quote
United States Steel Corporation
$18.73 (0.48%) $0.09
Steel Dynamics, Inc. Stock Quote
Steel Dynamics, Inc.
$72.64 (3.14%) $2.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.