Debt Management
Check out what companies owe!

The measures of debt management are debt to equity and interest cover ratios.

They are a guide to a company's debt management capability, including its ability to handle the interest on the debt.

Both measures are readily available on online brokers' websites.

How do I use them? A debt to equity ratio above 50% could spell danger of excessive debt. It could, however, relate to the funding of a recent acquisition.

Future earnings related to the acquisition may reduce the debt level swiftly in following years.

Interest cover indicates to what extent the cost of the debt, namely the interest payments, is covered by earnings.

It is generally considered that cover should be greater than two to provide a sufficient buffer. That is, the company's earnings should be greater than twice the interest payments on the debt.

Some companies are debt free, or are in a position to get out of debt quickly, because of strong cash flows. Warren Buffet likes low-debt companies. It's all about minimising risk.

I also look to see that long-term debt does not exceed three to four times the net profit of the company. This indicates that repayment of the debt from profits will not be onerous.

Debt to equity and interest cover figures are generally available on online broker sites.

Generally I look for companies with good (and stable) earnings per share growth and low debt.

Both do not always apply - particularly for ‘growth’ companies that are aggressively acquiring other companies and have higher debt.

So it is important to keep abreast of what a company is doing by reading the financial press and the company's announcements.

This enables me to obtain a clearer understanding of its debt to equity position and the reason(s) for it.

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