JFE Holdings to show its earnings power
Adding new performance indicators aims to shift mindset, raise credit rating
TOKYO -- JFE Holdings hopes to improve its credit rating by adding performance indexes such as those that measure cash flow to its next medium-term plan, starting in fiscal 2018, to better demonstrate medium- and long-term growth potential.
JFE Holdings traditionally prioritizes improving its balance sheet but will begin to demonstrate higher profitability as well. One index that could be adopted is the earnings before interest, tax, depreciation and amortization, or EBITDA, multiple, which shows how many years it would take a company to pay back its liabilities using cash flow from its main business. A multiple of 1 means that it would take one year for the company to repay its liabilities.
As of the end of March 2017, JFE Holdings' EBITDA multiple was in the upper 4 range. The company has decided to lower it to around 3, which is considered a criterion for getting a single A rating from foreign rating agencies. Moody's Japan currently rates JFE Holdings as Baa2.
Currently, JFE Holdings uses the debt-equity ratio, where a company's total liabilities are divided by its equity. The ratio demonstrates the degree to which equity covers deteriorating earnings and impaired assets, as well as other risks and liabilities. Although the company achieved a D/E ratio of 0.5 by the end of March 2017, its rating was not upgraded.
The company determined that a significant reason for its stagnant rating was low profitability. Introducing a new performance index is intended to help the company improve profitability by changing its mindset.
JFE Holdings' consolidated net profit for fiscal 2016 doubled from the prior year to 67.9 billion yen ($612 million). Although the figures appear strong, temporary profit from selling shares and higher asset valuations due to rising raw material prices drove the improvement. As margins in its steel business remains low, raising sale prices for steel products and lowering production costs have become urgent tasks for the company.