Could this 'further strengthening' boost the Fortescue share price moving forward?

Paying off debt could be a useful thing for Fortescue to do.

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Key points

  • Earlier this week, Fortescue announced it was going to pay down debt
  • It is repaying US$750 million of its 5.125% notes early
  • This move is likely to improve the company’s net profit

The Fortescue Metals Group Ltd (ASX: FMG) share price could get a boost over the longer term over the ASX mining share's latest move to improve its balance sheet.

Many investors pay a lot of attention to the company's income statement, but the balance sheet can be just as important, if not more important to a business's long-term health. Managing a company's assets and liabilities could be the difference between success and failure.

This week, Fortescue revealed a promising update regarding its balance sheet.

Redemption of senior unsecured notes

The ASX iron ore share announced to the market that it is redeeming its outstanding US$750 million 5.125% senior unsecured notes which are due in May 2024. The redemption will be completed on 1 June 2023.

Fortescue said that the notes will be "redeemed utilising cash on hand, further strengthening Fortescue's capital structure." A stronger balance sheet could be good news for the Fortescue share price. 

The company said that the redemption price for the notes will be 100% of the principal amount of the notes redeemed, plus any accrued interest up to, but excluding, the redemption date. Interest will not accrue and the notes will not be deemed to be outstanding on the redemption date.

What's the benefit of this move?

For Fortescue, it makes sense to redeem the notes and avoid paying that relatively expensive interest rate. I would guess that the interest income Fortescue could generate from having that cash in the bank wouldn't be as high as much as the notes are costing the ASX mining share.

The company's net assets figure doesn't change by making this move, but it should improve the net profit with a lower interest expense.

Investors typically like to value an ASX share based on the net profit after tax (NPAT) or cash flow that they're going to generate. Given this move should improve the NPAT and cash flow, it's likely to be seen as a benefit for the Fortescue share price, even if it's just a small benefit.

Fortescue share price snapshot

As we can see on the graph above, the ASX iron ore share has risen by around 2% over the past year. It has slightly outperformed the S&P/ASX 200 Index (ASX: XJO) over the same time period, which has risen by 1.3%.

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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