The purpose of the article is an assessment of risk, profitability and value as well as the relationships between these parameters for fifteen leading steel producers in the world. The research methodology uses return on assets, beta coefficient and price/book value ratio (P/BV). The research results allow us to verify negatively two research hypotheses: H1 – The largest steel producers in the world achieve a high level of return on assets and are specific for a lower risk level than the branch one; and H2 – Market value of the leading steel producers with high return on assets is higher than the book value of these enterprises

I. Jonek-Kowalska

English

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273METALURGIJA 54 (2015) 1, 273-275I. JONEK-KOWALSKARISK, PROFITABILITY AND VALUE OF THE LEADING STEEL PRODUCERS ON THE WORLD CAPITAL MARKETSReceived – Primljeno: 2014-02-04Accepted – Prihvaćeno: 2014-08-20Review Paper – Pregledni radISSN 0543-5846METABK 54(1) 273-275 (2014)UDC – UDK 669.14.002.2:338.5:332.572:06.03=111J. Jonek-Kowalska, Silesian University of Technology, Faculty of Orga-nization and Management, Zabrze, Poland The purpose of the article is an assessment of risk, profitability and value as well as the relationships between these parameters for fifteen leading steel producers in the world. The research methodology uses return on assets, beta coefficient and price/book value ratio (P/BV). The research results allow us to verify negatively two research hypoth-eses: H1 – The largest steel producers in the world achieve a high level of return on assets and are specific for a lower risk level than the branch one; and H2 – Market value of the leading steel producers with high return on assets is higher than the book value of these enterprises. Key words: steel producers, price/book value ratio, return on assets, beta coefficient INTRODUCTIONDemand for steel has been specific for the rising ten-dency for many years, which is mostly connected with a progressing development of the global economies. In 2012, according to data from the World Steel Associa-tion, steel producers manufactured 1,5 billion tons of steel, obtaining it from both original sources and recy-cling [1]. In light of the above, one may conclude that the steel industry has a sales market that can provide a long-term perspective. Moreover, the main steel pro-ducers in the world are global corporations; that is, they are well-known, experienced and renowned corpora-tions with stable position and market share. Nevertheless, steel production is a traditional indus-try that is very often negatively perceived in the context of threats that it poses to the life and health of employ-ees and natural environment. Therefore, it is currently a big challenge for steel producers to control and reduce carbon dioxide emissions in production processes [2, 3]. Another negative perception of the steel industry is also caused by promotion of an economy based on serv-ices in which traditional industries lose significance and are treated as mature or declining sectors [4]. An impor-tant role in the market assessment of steel producers is also played by economic fluctuations that have a nega-tive impact on demand and price level [5, 6]. Taking the circumstances above into account, there is an attempt made in the present article to confront the development perspectives of steel producers that are connected with the continuous infrastructural progress of the world with the less favorable image of traditional industries and cyclic demand for steel. For this purpose, basic parameters of market assessment of enterprises were used: profitability, meant as return rates, value, and risk of investment. In the first part of the article, ratios are presented via which the analysis was conduct-ed and research hypotheses stated. In the second part of the article, the research results are presented along with their synthetic summary.METHODOLOGYAs mentioned previously, the research included an assessment of return on assets, the enterprise’s market value and the risk of investment made. In the profitabil-ity assessment, return on assets (ROA) was used, calcu-lated as the relationship between net financial result and total assets of enterprise, represented by fixed and oper-ating assets [7, 8]: 100 %NIROAA where:NI – net income,A – total assets.In order to include a longer research perspective in the final calculations, the average ROA value was used from three yearly periods, encompassing the years 2011-2013 [9]. In the assessment of the market value of the exam-ined enterprises, the relationship of market price to book value was used [10]: 100P PBV BV  %where:P - price,BV - book value.274  METALURGIJA 54 (2015) 1, 273-275I. JONEK-KOWALSKA: RISK, PROFITABILITY AND VALUE OF THE LEADING STEEL PRODUCERS ON THE WORLD...Market price was determined on the basis of stock quotes of steel producers and book value on the basis of the company’s balance sheet. In this approach, the book value is the value of the enterprise’s assets adjusted by the value of current debt. If the value of P/BV ratio is higher than 1, the investors evaluate the enterprise high-er than if it results from the assets possessed. In this situation, the enterprise is over-valued in the market be-cause of a positive perception of its development poten-tial, also considering its current financial results. If the value of this ratio is lower than 1, then the enterprise is under-valued, which means a negative perception of its development potential. In the assessment of risk of investment, a beta coef-ficient was used (β). The β coefficient determines the risk level connected with investing in the assets of a particular enterprise. This coefficient depends on, among others, the type of activity conducted by the eco-nomic subject, structure of its assets and financing sources. The β coefficient, in practice, reflects the stock price fluctuations of a particular enterprise in the view of fluctuation of the whole stock exchange index [11, 12]. The value of β may be determined on the basis of the following formula: n1t2mmtn1tiitmmtmtmtit)()()()var(),cov(rrrrrrrrrwhere:mtit ),cov( rr   – covariance of return rate on an enter-prise’s stock and the market;mt )var(r  – variance of the market return rate;itr  – return rate on the enterprise’s stock in t period;mtr  – market return rate in t period;mr  – average market return rate in t period;ir–  average return rate on enterprise’s stock in t pe-riod; andt – period that is the basis for model parameters.A β coefficient equal to 1 means a typical risk level; higher than 1 is specific for enterprises of increased risk and lower than 1 is characteristic for enterprises of rela-tively low risk. Accordingly, this means that stock pric-es change at the same degree as the main stock index (coefficient equal to 1), at a higher degree (coefficient higher than 1) and at a lower degree (coefficient lower than 1).Assessment of risk, profitability and value was con-ducted among the 15 largest steel producers in the world [12]. A list of the producers was determined on the basis of the list published by the World Steel Association. Taking into consideration the fact that the World Steel Association included two private enterprises not listed on stock exchange (Shagang Group and Shandong Group), these two enterprises were added to the exam-ined group.At the beginning of the research conducted, on the basis of general theoretic rules, there were also two re-search hypotheses formed:H1 – The largest steel producers in the world achieve a high level of return on assets and are specific for a lower risk level than the branch risk level, H2 – Market value of the leading steel producers with high return on assets is higher than their book value.RESEARCH RESULTSA list of the examined enterprises, along with the values of the examined parameters and amount of steel production, is included in Table 1.Table 1  ROA, P/BV, β coefficient and production value for 15 leading steel producers in the worldNo. Enterprise name Production/ million tonROA/ %P/BV β1 ArcelorMittal 93,6 0,26 0,61 2,242 Nippon Steel & Sumi-tomo Metal Corp47,9 0,94 0,84 1,373 Hebei Iron & Steel Co Ltd42,8 0,78 0,44 1,264 Baoshan Iron & Steel Co Ltd42,7 4,13 0,57 1,185 POSCO 39,9 4,59 0,58 1,226 Wuhan Iron & Steel Co Ltd36,4 -1,26 0,03 1,457 Shougang Fushan Resources Group Ltd31,4 7,32 0,60 1,558 JFE Holdings Inc 30,4 0,51 0,74 1,739 Angang Steel Co Ltd 30,2 -1,42 0,59 1,6910 Tata Steel Ltd 23,0 1,83 1,01 1,8911 United States Steel Corp21,4 -4,89 1,27 2,3112 Nucor Corporation  20,1 3,29 2,01 1,3413 Gerdau S.A.  19,8 4,11 0,83 1,9014 Maanshan Iron & Steel 17,3 -1,14 0,50 1,1815 Hyundai Steel Co 17,1 3,85 0,66 1,51 – enterprises at the highest value of the examined parameter.Source:  own work based on financial results, stock quotes and World Steel Association data.For three largest steel producers in the world, the average return on net assets does not exceed 1 % in a three-year period. Four out of 15 examined enterprises are non-profitable. The five enterprises with the best re-sults obtain profitability in the range of 3 % to 5 %, which is a good result in a traditional industry. A record level of return on assets (over 7 %) is specific for Shou-gang Fushan Resources Group Ltd, which takes seventh place in the ranking according to its production level.The average risk level in the branch of large steel pro-ducers calculated by Bloomberg in the beta coefficient equaled 1,09 at the beginning of 2014. This means a slightly increased risk level in the whole branch of indus-try. According to the data included in Table 1, the largest steel producers markedly exceed the average for the sec-tor. The highest risk of investment is related to the branch leader – ArcelorMittal and United States Steel Corp.According to the above, Hypothesis H1, which says that the largest steel producers in the world achieve a high level of return on assets and are specific for a low-275METALURGIJA 54 (2015) 1, 273-275I. JONEK-KOWALSKA: RISK, PROFITABILITY AND VALUE OF THE LEADING STEEL PRODUCERS ON THE WORLD...er risk level than the branch one, was not confirmed. Their market bargaining power and rising demand for steel do not find a direct confirmation in the financial results and stability of stock quotes. Among the fifteen largest steel producers in the world three enterprises are over-valued; however, only the value of Nucor Corporation is doubled, which re-flects a high level of financial results. United States Steel Corp is an interesting case with 27 % over-valua-tion and losses occurring in the entire three-year period under examination. Finally, among six enterprises with the highest P/BV ratio values, only two of them are spe-cific for the highest ROA ratios in the examined group. It does not allow us to confirm Hypothesis H2 fully, ac-cording to which the market value of the leading steel producers with high return on assets is higher than the book value of these enterprises. SUMMARYOn the basis of the research results presented, it may be concluded that the leading steel producers in all finan-cial markets are characterized by an increased risk of in-vestment, which means that their stock quotes change more rapidly than the market indexes. Furthermore, posi-tive financial results are not always accompanied by positive market evaluation, finding its reflection in higher values of P/BV ratio. Most of the examined enterprises, despite considerable market shares and rising tendency concerning demand for steel, are under-valued [13].The research results presented in this article require extension and fulfillment, mostly in terms of analysis of conditions in the context of local markets and analysis of stock exchange specificity where the enterprises are listed [14], [15]. The extensions mentioned indicate the directions of further research in the area of the topic of the present article. REFERENCES[1]  World Steel in Figures 2013, World Steel Association 2013.[2]  K. Sienkiewicz-Małyjurek, Metalurgija, 53 (2014) 2, 254-256.[3]  T. Kilian, N. Hennigs, European Business Review, 26 (2014) 1, 79-101.[4]  F. J. Contractor, International Journal of Emerging Mar-kets, 8 (2013) 4, 304-328.[5]  K. Alajoutsijärvi, T. Mainela, P. Ulkuniemi, E. Montell, Management Decision, 50 (2012) 2, 291-304.[6]  K. Pałucha, Metalurgija, 53 (2012) 2, 254-256.[7]  M. Sierpińska, T. Jachna, Metody podejmowania decyzji finansowych, PWN, Warszawa 2007, pp. 102-108.[8]  M. Branda, M. Kopa, Central European Journal of Opera-tions Research, 22 (2014) 1, 13-35.[9]  R. Debnath, V. J. Sebastian, Journal of Advances in Mana-gement Research, 11 (2014) 1, 12-25.[10]  P. Borkowski, Ryzyko w działalności przedsiębiorstw, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk 2008, 112-118.[7]  P. Szczepankowski, Wycena i zarządzanie wartością przedsiębiorstwa, PWN, Warszawa 2007, 83-111.[11]  T. T. Kaczmarek, Ryzyko i zarządzanie ryzykiem. Ujęcie interdyscyplinarne, Difin, Warszawa 2008, 272-303.[12]  M. Arena, M. Arnaboldi, Management Research Review, 37 (2014) 2, 152-166.[13]  R. Khanduja, P. C. Tewari, International Journal of Quality & Reliability Management, 30 (2013) 5, 480-494.[14]  H. Wang, Y. Hong, Journal of Technology Management in China, 7 (2012) 1, 78-93.[15]  B. Bowden, A. Insch, Journal of Management History, 19 (2013) 1, 73-86.Note:  The responsible translator for English language is Lingua Class Weronika Skorupa, Gliwice, Poland. Additionally the text is after the proofreading.

Risk, profitability and value of the leading steel producers on the world capital markets

Jonek-Kowalska, Izabela

Repolis. Silesian University of Technology Digital Repository

The purpose of the article is an assessment of risk, profitability and value as well as the relationships between these parameters for fifteen leading steel producers in the world. The research methodology uses return on assets, beta coefficient and price/book value ratio (P/BV). The research results allow us to verify negatively two research hypotheses: H1 – The largest steel producers in the world achieve a high level of return on assets and are specific for a lower risk level than the branch one, and H2 – Market value of the leading steel producers with high return on assets is higher than the book value of these enterprises

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273 METALURGIJA 54 (2015) 1, 273-275I. JONEK-KOWALSKARISK, PROFITABILITY AND VALUE OF THE LEADING STEEL PRODUCERS ON THE WORLD CAPITAL MARKETSReceived – Primljeno: 2014-02-04Accepted – Prihvaćeno: 2014-08-20Review Paper – Pregledni radISSN 0543-5846METABK 54(1) 273-275 (2014)UDC – UDK 669.14.002.2:338.5:332.572:06.03=111J. Jonek-Kowalska, Silesian University of Technology, Faculty of Orga-nization and Management, Zabrze, Poland The purpose of the article is an assessment of risk, profitability and value as well as the relationships between these parameters for fifteen leading steel producers in the world. The research methodology uses return on assets, beta coefficient and price/book value ratio (P/BV). The research results allow us to verify negatively two research hypoth-eses: H1 – The largest steel producers in the world achieve a high level of return on assets and are specific for a lower risk level than the branch one; and H2 – Market value of the leading steel producers with high return on assets is higher than the book value of these enterprises. Key words: steel producers, price/book value ratio, return on assets, beta coefficient INTRODUCTIONDemand for steel has been specific for the rising ten-dency for many years, which is mostly connected with a progressing development of the global economies. In 2012, according to data from the World Steel Associa-tion, steel producers manufactured 1,5 billion tons of steel, obtaining it from both original sources and recy-cling [1]. In light of the above, one may conclude that the steel industry has a sales market that can provide a long-term perspective. Moreover, the main steel pro-ducers in the world are global corporations; that is, they are well-known, experienced and renowned corpora-tions with stable position and market share. Nevertheless, steel production is a traditional indus-try that is very often negatively perceived in the context of threats that it poses to the life and health of employ-ees and natural environment. Therefore, it is currently a big challenge for steel producers to control and reduce carbon dioxide emissions in production processes [2, 3]. Another negative perception of the steel industry is also caused by promotion of an economy based on serv-ices in which traditional industries lose significance and are treated as mature or declining sectors [4]. An impor-tant role in the market assessment of steel producers is also played by economic fluctuations that have a nega-tive impact on demand and price level [5, 6]. Taking the circumstances above into account, there is an attempt made in the present article to confront the development perspectives of steel producers that are connected with the continuous infrastructural progress of the world with the less favorable image of traditional industries and cyclic demand for steel. For this purpose, basic parameters of market assessment of enterprises were used: profitability, meant as return rates, value, and risk of investment. In the first part of the article, ratios are presented via which the analysis was conduct-ed and research hypotheses stated. In the second part of the article, the research results are presented along with their synthetic summary.METHODOLOGYAs mentioned previously, the research included an assessment of return on assets, the enterprise’s market value and the risk of investment made. In the profitabil-ity assessment, return on assets (ROA) was used, calcu-lated as the relationship between net financial result and total assets of enterprise, represented by fixed and oper-ating assets [7, 8]: 100 %NIROAAwhere:NI – net income,A – total assets.In order to include a longer research perspective in the final calculations, the average ROA value was used from three yearly periods, encompassing the years 2011-2013 [9]. In the assessment of the market value of the exam-ined enterprises, the relationship of market price to book value was used [10]:  100PPBV BV  %where:P - price,BV - book value.274   METALURGIJA 54 (2015) 1, 273-275I. JONEK-KOWALSKA: RISK, PROFITABILITY AND VALUE OF THE LEADING STEEL PRODUCERS ON THE WORLD...Market price was determined on the basis of stock quotes of steel producers and book value on the basis of the company’s balance sheet. In this approach, the book value is the value of the enterprise’s assets adjusted by the value of current debt. If the value of P/BV ratio is higher than 1, the investors evaluate the enterprise high-er than if it results from the assets possessed. In this situation, the enterprise is over-valued in the market be-cause of a positive perception of its development poten-tial, also considering its current financial results. If the value of this ratio is lower than 1, then the enterprise is under-valued, which means a negative perception of its development potential. In the assessment of risk of investment, a beta coef-ficient was used (β). The β coefficient determines the risk level connected with investing in the assets of a particular enterprise. This coefficient depends on, among others, the type of activity conducted by the eco-nomic subject, structure of its assets and financing sources. The β coefficient, in practice, reflects the stock price fluctuations of a particular enterprise in the view of fluctuation of the whole stock exchange index [11, 12]. The value of β may be determined on the basis of the following formula:    n1 t2m mtn1 ti it m mtmtmt it) () ( ) () var() , cov(r rr r r rrr rwhere:mt it ) , cov( r r    – covariance of return rate on an enter-prise’s stock and the market;mt ) var(r  – variance of the market return rate;it r  – return rate on the enterprise’s stock in t period;mt r  – market return rate in t period;m r  – average market return rate in t period;i r–   average return rate on enterprise’s stock in t pe-riod; andt – period that is the basis for model parameters.A β coefficient equal to 1 means a typical risk level; higher than 1 is specific for enterprises of increased risk and lower than 1 is characteristic for enterprises of rela-tively low risk. Accordingly, this means that stock pric-es change at the same degree as the main stock index (coefficient equal to 1), at a higher degree (coefficient higher than 1) and at a lower degree (coefficient lower than 1).Assessment of risk, profitability and value was con-ducted among the 15 largest steel producers in the world [12]. A list of the producers was determined on the basis of the list published by the World Steel Association. Taking into consideration the fact that the World Steel Association included two private enterprises not listed on stock exchange (Shagang Group and Shandong Group), these two enterprises were added to the exam-ined group.At the beginning of the research conducted, on the basis of general theoretic rules, there were also two re-search hypotheses formed:H1 – The largest steel producers in the world achieve a high level of return on assets and are specific for a lower risk level than the branch risk level, H2 – Market value of the leading steel producers with high return on assets is higher than their book value.RESEARCH RESULTSA list of the examined enterprises, along with the values of the examined parameters and amount of steel production, is included in Table 1.Table 1   ROA, P/BV, β coefficient and production value for 15 leading steel producers in the worldNo. Enterprise name Production/ million tonROA/ %P/BV β1 ArcelorMittal 93,6 0,26 0,61 2,242 Nippon Steel & Sumi-tomo Metal Corp47,9 0,94 0,84 1,373 Hebei Iron & Steel Co Ltd42,8 0,78 0,44 1,264 Baoshan Iron & Steel Co Ltd42,7 4,13 0,57 1,185 POSCO 39,9 4,59 0,58 1,226 Wuhan Iron & Steel Co Ltd36,4 -1,26 0,03 1,457 Shougang Fushan Resources Group Ltd31,4 7,32 0,60 1,558 JFE Holdings Inc 30,4 0,51 0,74 1,739 Angang Steel Co Ltd 30,2 -1,42 0,59 1,6910 Tata Steel Ltd 23,0 1,83 1,01 1,8911 United States Steel Corp21,4 -4,89 1,27 2,3112 Nucor Corporation  20,1 3,29 2,01 1,3413 Gerdau S.A.  19,8 4,11 0,83 1,9014 Maanshan Iron & Steel 17,3 -1,14 0,50 1,1815 Hyundai Steel Co 17,1 3,85 0,66 1,51 – enterprises at the highest value of the examined parameter.Source:   own work based on financial results, stock quotes and World Steel Association data.For three largest steel producers in the world, the average return on net assets does not exceed 1 % in a three-year period. Four out of 15 examined enterprises are non-profitable. The five enterprises with the best re-sults obtain profitability in the range of 3 % to 5 %, which is a good result in a traditional industry. A record level of return on assets (over 7 %) is specific for Shou-gang Fushan Resources Group Ltd, which takes seventh place in the ranking according to its production level.The average risk level in the branch of large steel pro-ducers calculated by Bloomberg in the beta coefficient equaled 1,09 at the beginning of 2014. This means a slightly increased risk level in the whole branch of indus-try. According to the data included in Table 1, the largest steel producers markedly exceed the average for the sec-tor. The highest risk of investment is related to the branch leader – ArcelorMittal and United States Steel Corp.According to the above, Hypothesis H1, which says that the largest steel producers in the world achieve a high level of return on assets and are specific for a low-275 METALURGIJA 54 (2015) 1, 273-275I. JONEK-KOWALSKA: RISK, PROFITABILITY AND VALUE OF THE LEADING STEEL PRODUCERS ON THE WORLD...er risk level than the branch one, was not confirmed. Their market bargaining power and rising demand for steel do not find a direct confirmation in the financial results and stability of stock quotes. Among the fifteen largest steel producers in the world three enterprises are over-valued; however, only the value of Nucor Corporation is doubled, which re-flects a high level of financial results. United States Steel Corp is an interesting case with 27 % over-valua-tion and losses occurring in the entire three-year period under examination. Finally, among six enterprises with the highest P/BV ratio values, only two of them are spe-cific for the highest ROA ratios in the examined group. It does not allow us to confirm Hypothesis H2 fully, ac-cording to which the market value of the leading steel producers with high return on assets is higher than the book value of these enterprises. SUMMARYOn the basis of the research results presented, it may be concluded that the leading steel producers in all finan-cial markets are characterized by an increased risk of in-vestment, which means that their stock quotes change more rapidly than the market indexes. Furthermore, posi-tive financial results are not always accompanied by positive market evaluation, finding its reflection in higher values of P/BV ratio. Most of the examined enterprises, despite considerable market shares and rising tendency concerning demand for steel, are under-valued [13].The research results presented in this article require extension and fulfillment, mostly in terms of analysis of conditions in the context of local markets and analysis of stock exchange specificity where the enterprises are listed [14], [15]. The extensions mentioned indicate the directions of further research in the area of the topic of the present article. REFERENCES[1]    World Steel in Figures 2013, World Steel Association 2013.[2]   K. Sienkiewicz-Małyjurek, Metalurgija, 53 (2014) 2, 254-256.[3]    T. Kilian, N. Hennigs, European Business Review, 26 (2014) 1, 79-101.[4]   F. J. Contractor, International Journal of Emerging Mar-kets, 8 (2013) 4, 304-328.[5]   K. Alajoutsijärvi, T. Mainela, P. Ulkuniemi, E. Montell, Management Decision, 50 (2012) 2, 291-304.[6]   K. Pałucha, Metalurgija, 53 (2012) 2, 254-256.[7]   M. Sierpińska, T. Jachna, Metody podejmowania decyzji finansowych, PWN, Warszawa 2007, pp. 102-108.[8]   M. Branda, M. Kopa, Central European Journal of Opera-tions Research, 22 (2014) 1, 13-35.[9]   R. Debnath, V. J. Sebastian, Journal of Advances in Mana-gement Research, 11 (2014) 1, 12-25.[10]   P. Borkowski, Ryzyko w działalności przedsiębiorstw, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk 2008, 112-118.[7]    P. Szczepankowski, Wycena i zarządzanie wartością przedsiębiorstwa, PWN, Warszawa 2007, 83-111.[11]   T. T. Kaczmarek, Ryzyko i zarządzanie ryzykiem. Ujęcie interdyscyplinarne, Difin, Warszawa 2008, 272-303.[12]   M. Arena, M. Arnaboldi, Management Research Review, 37 (2014) 2, 152-166.[13]   R. Khanduja, P. C. Tewari, International Journal of Quality & Reliability Management, 30 (2013) 5, 480-494.[14]   H. Wang, Y. Hong, Journal of Technology Management in China, 7 (2012) 1, 78-93.[15]   B. Bowden, A. Insch, Journal of Management History, 19 (2013) 1, 73-86.Note:   The responsible translator for English language is Lingua Class Weronika Skorupa, Gliwice, Poland. Additionally the text is after the proofreading.

Risk, profitability and value of the leading steel producers on the world capital markets

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