Acceptable total debt/equity ratio?
When looking at a company's portfolio, what is an acceptable ratio for total debt/equity when purchasing stock?
Answers: In general Bob give you a good answer. In my opinion however here certainly can be too much debt. When things head south, debt is a millstone around a company's d¨Ścolletage. Certain companies can stand more debt than others, in fact require it. Utilities are a prime example where on earth high levels of debt are not so burdensom as it might be beside other types of companies. But even with utilities, one will find that some have a much high level than others.
As Bob suggested comparing debt levels of companies in industry groups is a very good method to arrive at what a modest level of debt might be. As a certain Wall Street firm found out the strong way, having a huge amount of debt can be mortal especially if lenders loose confidence surrounded by your ability to pay it backbone.
In general debt financing is less costly than equity financing because interest expense is a import tax write off for businesses whereas equity financing is not. Also debt financing provides eps leverage so during good times eps tend to grow very fast. During doomed to failure times however interest expense can bankrupt a company as can the inability to repay ones borrowings.
For manufacturing companies a classical rule of thumb be 2 to 1 equity to debt ratio. When a company approaches 1 to 1 things can become very worrysome.
Debt is one of the things that frightens me away from GE. They are loaded with debt to service their nouns operations. They are sort of a Countrywide masquerading as a manufacturing company.
Too unpromising the U S government has not on the other hand learned that lesson.
There is no absolute "good" number. You involve to compare a company to other companies in the same industry. Some industries in recent times depend on credit more than others.
High debt is good because if things go ably there are fewer shareholders to split the profits next to and the stock price will zoom up.
High debt is bad because management have limitations placed on it by the burden of interest and repayment obligations.
You decide what sympathetic of risk you want to bear in expectation of getting what quality of reward.
What does the general picture present? What are you willing to settle beside? It is a relative issue.
Banks, for instance, may have billions on deposit, but they belong to other people, so while they are assets, they are also liability. There are a variety of ratios that are applicable to bank for the sake of banking regulations and common business practices, but even after a bank with a immensely fluid flux of business is different from an old fashioned savings ridge. I know of a bank that doesn't (or at least ultimate I heard didn't) loan money -- they bought Treasury bonds and notes for interest income. This be essentially a savings bank picture, but I know a funds bank that instead has a dynamic loan and investment mix. Both would be "acceptable" investments. So if I resembling my dogs, horses, and companies to be slow and steady, take the former. But if I like them playful, moving, and hard-working, take the latter.
The actual trick, then, is what is the company doing, or going to do, with the money? I tend to look for companies beside a big ROE, yet for you to center instead on a healthy ROA is no denounce or crime. Borrowed money IS a liability, but it is also an asset. I know a businessman who is leveraged to the hilt in everything he does. I know a businessman who avoids debt like the plague. They are both valued mentors because they are not singular solid persons in their own right, but both clear an enormous amount of money in their respective enterprise.
So, there is more to the business than a debt/equity ratio that fits in your preferred catalogue.
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Answers: In general Bob give you a good answer. In my opinion however here certainly can be too much debt. When things head south, debt is a millstone around a company's d¨Ścolletage. Certain companies can stand more debt than others, in fact require it. Utilities are a prime example where on earth high levels of debt are not so burdensom as it might be beside other types of companies. But even with utilities, one will find that some have a much high level than others.
As Bob suggested comparing debt levels of companies in industry groups is a very good method to arrive at what a modest level of debt might be. As a certain Wall Street firm found out the strong way, having a huge amount of debt can be mortal especially if lenders loose confidence surrounded by your ability to pay it backbone.
In general debt financing is less costly than equity financing because interest expense is a import tax write off for businesses whereas equity financing is not. Also debt financing provides eps leverage so during good times eps tend to grow very fast. During doomed to failure times however interest expense can bankrupt a company as can the inability to repay ones borrowings.
For manufacturing companies a classical rule of thumb be 2 to 1 equity to debt ratio. When a company approaches 1 to 1 things can become very worrysome.
Debt is one of the things that frightens me away from GE. They are loaded with debt to service their nouns operations. They are sort of a Countrywide masquerading as a manufacturing company.
Too unpromising the U S government has not on the other hand learned that lesson.
There is no absolute "good" number. You involve to compare a company to other companies in the same industry. Some industries in recent times depend on credit more than others.
High debt is good because if things go ably there are fewer shareholders to split the profits next to and the stock price will zoom up.
High debt is bad because management have limitations placed on it by the burden of interest and repayment obligations.
You decide what sympathetic of risk you want to bear in expectation of getting what quality of reward.
What does the general picture present? What are you willing to settle beside? It is a relative issue.
Banks, for instance, may have billions on deposit, but they belong to other people, so while they are assets, they are also liability. There are a variety of ratios that are applicable to bank for the sake of banking regulations and common business practices, but even after a bank with a immensely fluid flux of business is different from an old fashioned savings ridge. I know of a bank that doesn't (or at least ultimate I heard didn't) loan money -- they bought Treasury bonds and notes for interest income. This be essentially a savings bank picture, but I know a funds bank that instead has a dynamic loan and investment mix. Both would be "acceptable" investments. So if I resembling my dogs, horses, and companies to be slow and steady, take the former. But if I like them playful, moving, and hard-working, take the latter.
The actual trick, then, is what is the company doing, or going to do, with the money? I tend to look for companies beside a big ROE, yet for you to center instead on a healthy ROA is no denounce or crime. Borrowed money IS a liability, but it is also an asset. I know a businessman who is leveraged to the hilt in everything he does. I know a businessman who avoids debt like the plague. They are both valued mentors because they are not singular solid persons in their own right, but both clear an enormous amount of money in their respective enterprise.
So, there is more to the business than a debt/equity ratio that fits in your preferred catalogue.