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Showing posts with label Debt. Show all posts
Showing posts with label Debt. Show all posts

Saturday, October 28, 2017

Look at High Debt while Evaluating Stocks

Dear Reader,
Should you invest in companies that carry large amounts of debt? That is a question every investor should ask when evaluating stocks.

Unfortunately, the answer isn’t as easy as “yes or no.” The correct answer is “it depends.” The problem is that some industries typically require more debt than others do.

For these industries, a higher debt load is normal. For example, utilities often borrow large sums of money when building new power plants. It may take several years to build the plant, which means no revenue and lots of debt.

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings. 

We learnt from the great crisis of 2011 that companies with high debt on their books simply get slaughtered. While debt per se is not bad (if the company is able to borrow at a lower rate and deploy it in its business at a higher rate, the operating leverage works in its favour), excessive debt with high interest and repayment obligations can crunch the stock in times of downturn. So, as a long-term investment philosophy, it is best to steer clear of high-debt companies. 

Avoid Investing in Companies with High Capex Requirement 

We know the demerits of investing in stocks like Suzlon & GMR which have an insatiable appetite for more and more capital. To feed their perennial hunger, these companies dilute their equity by making FPOs, GDRs & FCCBs resulting in total destruction of shareholders wealth. Companies should be lean and mean requiring minimal capital but generating huge returns there from.

Do write to us in case of any queries, we will be delighted to assist you.

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 7:20:00 PM
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Tuesday, August 1, 2017

Look at High Debt while Evaluating Stocks

Dear Reader,
Should you invest in companies that carry large amounts of debt? That is a question every investor should ask when evaluating stocks.

Unfortunately, the answer isn’t as easy as “yes or no.” The correct answer is “it depends.” The problem is that some industries typically require more debt than others do.

For these industries, a higher debt load is normal. For example, utilities often borrow large sums of money when building new power plants. It may take several years to build the plant, which means no revenue and lots of debt.

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings. 

We learnt from the great crisis of 2011 that companies with high debt on their books simply get slaughtered. While debt per se is not bad (if the company is able to borrow at a lower rate and deploy it in its business at a higher rate, the operating leverage works in its favour), excessive debt with high interest and repayment obligations can crunch the stock in times of downturn. So, as a long-term investment philosophy, it is best to steer clear of high-debt companies. 

Avoid Investing in Companies with High Capex Requirement 

We know the demerits of investing in stocks like Suzlon & GMR which have an insatiable appetite for more and more capital. To feed their perennial hunger, these companies dilute their equity by making FPOs, GDRs & FCCBs resulting in total destruction of shareholders wealth. Companies should be lean and mean requiring minimal capital but generating huge returns there from. 

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 9:30:00 AM
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Thursday, June 1, 2017

Look at High Debt while Evaluating Stocks

Dear Reader,
Should you invest in companies that carry large amounts of debt? That is a question every investor should ask when evaluating stocks.

Unfortunately, the answer isn’t as easy as “yes or no.” The correct answer is “it depends.” The problem is that some industries typically require more debt than others do.

For these industries, a higher debt load is normal. For example, utilities often borrow large sums of money when building new power plants. It may take several years to build the plant, which means no revenue and lots of debt.

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings. 

We learnt from the great crisis of 2011 that companies with high debt on their books simply get slaughtered. While debt per se is not bad (if the company is able to borrow at a lower rate and deploy it in its business at a higher rate, the operating leverage works in its favour), excessive debt with high interest and repayment obligations can crunch the stock in times of downturn. So, as a long-term investment philosophy, it is best to steer clear of high-debt companies. 

Avoid Investing in Companies with High Capex Requirement 

We know the demerits of investing in stocks like Suzlon & GMR which have an insatiable appetite for more and more capital. To feed their perennial hunger, these companies dilute their equity by making FPOs, GDRs & FCCBs resulting in total destruction of shareholders wealth. Companies should be lean and mean requiring minimal capital but generating huge returns there from. 

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 6:10:00 PM
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Saturday, June 30, 2012

Look at High Debt while Evaluating Stocks


Should you invest in companies that carry large amounts of debt? That is a question every investor should ask when evaluating stocks.

Unfortunately, the answer isn’t as easy as “yes or no.” The correct answer is “it depends.” The problem is that some industries typically require more debt than others do.

For these industries, a higher debt load is normal. For example, utilities often borrow large sums of money when building new power plants. It may take several years to build the plant, which means no revenue and lots of debt.

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 12:30:00 PM
Labels: ,

Sunday, June 12, 2011

Watch Out for Stocks with High Debt Load

If you asked a bank for an unsecured loan, but had huge credit card bills, a big mortgage payment, a couple of high-end leased cars and two children in private schools, you might get a quick “No".

The bank would be doing you a favour by not digging you any deeper in debt than you already are and setting you up for a hard financial fall that will likely come if you keep spending beyond your means.

Yet, that’s just what some companies do when their business is booming (or so they think).

To finance growth, the company piles on debt in all forms from lines of credit with the bank to vendor credit to issuing bonds or other longer-term arrangements.

Leverage often works great when a business is growing and gaining market share, but all that borrowed money has to be repaid.

If business conditions reverse, the borrowed money still has to be repaid and that can be a problem when cash flow is shrinking instead of expanding.

The lesson for investors is to keep an eye on the amount of debt a company is piling up. Too much debt will drain the company of cash to meet payments and if cash becomes tight, the company may face a severe cash crunch.

How much is too much debt?

That depends on the industry. A utility or cable television company, for example, must spend a tremendous amount of money upfront and wait years before the payoff begins. Other companies don’t need as much debt – service companies for example.

In any case, look at others in the same industry for comparisons. If your target company is out of line with the industry, it may be a warning sign.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 10:30:00 PM
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Friday, August 13, 2010

Avoid Plastic Money & Save High Interest Rates

"I can get no remedy against this consumption of the purse: borrowing only lingers and lingers it out, but the disease is incurable." -Shakespeare, William (1564 - 1616)

How thick is your billfold these days? Is it full of cash or credit cards?

One of the critical keys to investing is only to use money that is free of other obligations. The quick way to increase the power of your money is common sense:

Pay for everything in cash and don't incur any debt.

That's easily said if you have a high income. But not everyone has that luxury, and even those of you who do, find it hard to resist the temptation to borrow. Formulate a debt reduction plan today and follow through on it. Paying off your credit cards is your best single investment.

Where else can you get a risk free, guaranteed rate of return, of up to 20%?

It is the old story of a penny saved is a penny earned.

In looking at your financial position, until you pay off your existing debt, your investment returns will be offset by the interest you are paying on your debt service.

Credit cards are a great convenience that millions of us use all the time for dozens of reasons. Plastic money is also a great source of financial pain and suffering. People get caught up in the really low minimum payment schedules and the easy ways that they can get cards.

And what has happened? 
Record numbers of people find themselves in financial troubles!


So what's the answer?
Have only one card! Use it to guarantee hotel rooms, get rental cars and to make purchases when there is a really good sale on something you absolutely want or need. Pay all the balance every time you get a statement.

If you want to reduce the number of your credit cards, then you have a few options:

A. Pay them off as fast as you can!

B. Pay the one with the smallest balance, then take that payment and add it to the next one, and so on until you're done.

C. Pay more than the minimums where possible. It can take years to pay off a balance by paying minimums only.

If you still have a card with a high interest rate, and are carrying a balance, get a new card with a lower rate and transfer the balance. Call the credit card companies and tell them you want the accounts canceled.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 10:00:00 AM
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Wednesday, August 11, 2010

Tools to Evaluate Stocks with High Debt


Should you invest in companies that carry large amounts of debt? That is a question every investor should ask when evaluating stocks.

Unfortunately, the answer isn’t as easy as “yes or no.” The correct answer is “it depends.” The problem is that some industries typically require more debt than others do.

For these industries, a higher debt load is normal. For example, utilities often borrow large sums of money when building new power plants. It may take several years to build the plant, which means no revenue and lots of debt.

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 3:00:00 PM
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Look at Debt while Evaluating Stocks

When the economy is in trouble, you may want to pay more attention to debt when evaluating a stock for investment. Companies that a carry heavy debt load may be at risk in a difficult economy.

There are several measurements you can use to gauge whether a company may be carrying too much debt. Both come off the balance sheet if you want to do the math yourself or you can find the ratios on several online services.

The two ratios are part of a set of metrics that help you determine the financial health of a company when you are evaluating its stock for investment. Below are the two definitions before we move on:

Definitions

• Current Liabilities are bills that will come due in the next 12 months. These include the company’s normal operating expenses such as salaries, utilities, and so on. Long-tern debt, such as mortgages would not be included, however that portion of payments due in the next 12 months would be included.

• Current Assets are marketable securities, cash and other assets that can be easily converted to cash within 12 months. Land and real estate do not fall into this category because it often takes longer than a year to sell property.

The first ratio is the Quick Ratio. This ratio gives you an idea how easily the company can pay its current obligations – that is those bills due in the next 12 months.

Quick Ratio

The Quick Ratio is cash, marketable securities and accounts receivable divided by current liabilities (those due in the next 12 months). However, not all Current Assets are included in this ratio - excluded are accounts receivable and inventory. Basically, you are saying if all income stopped tomorrow and the company sold off its readily convertible assets, could it meet its current obligations?

A Quick Ratio of 1.00 means the company has just enough current assets to cover current obligations. Something higher than 1.00 indicates there are more current assets than current obligations.

It is important to compare companies with others in the same sector because different industries operate with ratios that may vary from one sector to another. Some industries such as utilities, for example carry much more debt than other industries and should only be compared to other utilities.

Current Ratio

The second ratio is the Current Ratio. The Current Ratio is very similar to the Quick Ratio, but broadens the comparison to include all Current Liabilities and all Current Assets. It measures the same financial strength as the Quick Ratio that is a company’s ability to meet its short-term obligations.

Some analysts like the Current Ratio better because it is more “real world” in that a company would convert every available asset to stay afloat if needed. The Current Ratio measures that better than the Quick Ratio.

Like the Quick Ratio, 1.00 or better is good, and likewise you should always compare companies in the same sector.

Theses two ratios, which you can find on most of the financial web site that offer quotes, tell you a great deal, about how a company may or may not weather tough times. Low numbers in these ratios should be a red flag when you are evaluating a stock.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 11:00:00 AM
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