CHAPTER 7
Stock Research Checklist—Debt
Debt is an important part of a business. If it is manageable debt, then it is acceptable. But, if the debt load is very high, it will be very hard for that business to succeed; sometimes the company will even end up in bankruptcy. The investors will end up losing all their money. Some industries are capital intensive; they have to use debt to finance their capital investment apart from equity capital. For example, industrial and manufacturing companies need to invest large amounts of money for factories in order to keep them up to date. Auto industries need to spend every couple of years to retool the auto-manufacturing capabilities.
Does the Company Have Manageable Debt?
Normally, I suggest you shy away from heavily capital-intensive businesses. But suppose you find a capital-intensive business at a bargain price. Here you can compare that company’s debt level with a direct competitor. If the company can pay off total debt with five years of net income, then that should be a manageable debt.
Find out when the current debt is coming due. If any debt is due within a couple of years, what kind of plan does the company have to pay off that loan? When the company has debt as a bond, it is less risk to the company. Long-term bonds are a good kind of debt to have.
The economy goes through life cycles: recessions, recoveries, and boom periods. If a company loads up on too much debt during boom years, it can generate a higher revenue and be able ...
