Introduction
As shown in the attached Excel file, the three-year return for US Steel Corporation was 13.07% (C19, ratios). A closer review of the share prices shows that the prices rose between April 2014 and October 2014; thereafter, they started to decline until January 2016, when the share prices started to rise again. The average return for the entire period was 3.07% (C20, ratios).
In the case of AK Steel Holdings, the three-year return was -8.86% (G19, ratios). A closer analysis of the share prices shows that there was an increase between April 2014 and August 2014. Thereafter, the share prices declined until February 2016, after which the share prices rose again. The average return for the entire period was 2.35% (G20, ratios).
A comparison of the share prices of these two companies shows that they had a similar trend over the three years. However, the shares of US Steel Corporation had a higher return and range than those of AK Steel Holdings, which indicates that US Steel Corporation is more profitable than AK Steel Holdings.
Industry average
A comparison of the performance of the two companies against the industry average shows that the two companies both performed poorly. For instance, the profit margins for the two companies (row 6, ratios) were lower than the industry average of 1.21% (I6, ratios). The two companies both had a negative profit for some years. Secondly, the industry average for the price-earnings ratio was 16.63. The values of this ratio for US Steel Corporation ranged from -12.83 to -37.66, while those of AK Steel holdings ranged between -340.33 and -0.78 (row 9, ratios). The ratios for AK Steel Corporation were lower than those of US Steel Corporation. Finally, the debt-equity ratio for the industry was 0.09. The values of AK Steel Corporation ranged between -2.41 and -6.67, while the ratios for US Steel Corporation ranged between 0.92 and 1.33 (row 10, ratios). The ratios for US Steel Corporation were higher than the industry average. Besides, the ratios for AK Steel Corporation show that the company is wholly financed using debt. Thus, the two companies performed dismally compared to the industry average.
Performance over time
An analysis of the performance of US Steel Corporation shows that the company’s profitability deteriorated over the three years, as indicated by the profit margin and return on equity (row 6 and 7, ratios). The decrease in profit level can mainly be attributed to the declining values of sales and net income. The earnings per share also dropped from 0.71 in 2014 (E8, ratios) to -11.24 in 2015 (D8, ratios), after which the value improved slightly in 2016 to -2.81 (C8, ratios). The price-earnings ratio also followed the same trend. This trend can mainly be explained by changes in profit and stock prices. Further, the leverage of the company moved from 0.92 in 2014 to 1.33 in 2016 (row 10, ratio), an increase that was primarily caused by a large decline in equity. The free cash flow dropped from $1,073 million in 2014 (E11, ratios) to -$141 million in 2015 (D11, ratios). This decrease was mainly caused by a drop in net earnings generated from operating activities and an increase in capital expenditures. The value grew to $421 million in 2016 due to an increase in cash flow generated from operating activities and a decline in capital expenditures.
In the case of AK Steel Holdings, the profit margin and return on equity show that the profit level of the company dropped between 2014 and 2015, a drop that can be explained by a decline in net income and an increase in sales. In 2016, the values improved slightly due to an increase in net earnings. The earnings per share for the company were negative due to the negative income that is attributed to common shareholders. The price-earnings ratio ranged between -0.78 and -340.33 over the period (row 9, ratios), while the debt-equity ratio grew from -4.92 in 2014 (H10, ratios) to -2.41 in 2015 (G10, ratios) and later dropped to -6.67 in 2016. These values show that the company is wholly financed by debt. The negative value of equity is mainly caused by an accumulated deficit and other comprehensive losses. Finally, the company’s free cash flow grew from -$403.90 million in 2014 (H11, ratios) to $177 million in 2016 (F11, ratios).
A comparison of the two companies shows that the financial position in terms of liquidity, profitability, efficiency, and leverage for US Steel Corporation is better than that of AK Steel Holdings (Clarke, 2012).
Investment
Based on their financial standings and the analysis above, the two companies can be considered value companies because they are no longer experiencing growth in earnings. Besides, the price-earnings ratios show that they are undervalued compared to the industry average. They seem suitable for long-term investors.
The stock of US Steel Corporation is a better choice for investment than that of AK Steel Holdings, as it offers a better return as discussed above. Despite the low earnings and declining sales levels, the company has better liquidity and leverage, and their shares have a higher value than that of the competitor. The free cash flow also shows that despite the low earnings, the company has excess cash to invest in other projects (Horner, 2013).
References
Clarke, E. A. (2012). Accounting: An introduction to principles + practice (7th ed.). South Melbourne, Victoria: Cengage Learning Australia.
Horner, D. (2013). Accounting for non-accountants (9th ed.). New Delhi, India: Kogan Page Ltd.
