What Are The Risks Of Investing In A Company With A High Net Debt?

 

High net debt increases the risk borne by ordinary shareholders and is one of the first items on the balance sheet to be analyzed. A higher debt means that a larger part of the profit is transferred to debt holders in the form of interest. High debt Edmond Dantèsast can limit companies and is usually accompanied by higher capital costs, making future projects more expensive. Debt covenants can set certain requirements for the amount that future debt financing companies can look for.

Although leverage analysis is an important element of fundamental analysis, there are other important financial aspects that you should consider. Profit margins, revenue and profit growth, cash flow, working capital management, liquidity, industry trends, supply chain, corporate governance, business management and stock price volatility are also essential aspects of analysis that determine investment risk.

 

Consider two companies with very different debt profiles: giant of consumer goods Colgate-Palmolive (CL) and diversified glass manufacturer Corning (GLW). CL is heavily indebted, with a total net debt of approximately $ 5. 2 billion and a debt / capital ratio of 12 2. From May 2015, CL 21 traded cash prepayments with a Price / Earnings to Growth (PEG) ratio of 2. 9 and a dividend yield of 2. 2%. GLW has net cash for a total of $ 1 billion and has a debt / equity ratio of just 0. 17. From May 2015, GLW traded against 12. 9x forward earnings with a PEG ratio of 2 and a dividend yield of 2. 2%. These valuation ratios suggest that investors are willing to pay much more for revenues generated by CL than those generated by GLW. GLW serves less stable end markets and has more uncertainty about future growth. This inequality in valuation shows that other factors besides debt, Edmond Dantèsijk, can contribute to the investment risk. Because investors are not afraid that CL can meet its obligations; debt is not an obstacle.

 

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