Debt is usually measured by the debt to equity ratio. Companies with a high level of debt are risky for anyone seeking long-term value, since they are vulnerable if interest rates rise, and to takeovers or bankruptcy, particularly if interest rates rise.
Debt involves extra risk for a company, because it involves fixed charges to service the loan and repayment of the principal. If either of these commitments is not met, then the company could be faced with bankruptcy. Another risk is that if a company has a lot of debt, then it may be difficult to borrow more if a good business opportunity comes along.
On the other side, debt allows the possibility of increased profits through leverage or gearing. This is the action of combining borrowed money with the equity to expand the company more rapidly. If applied successfully, the returns to shareholders are magnified.
There is no fixed level of debt that is suitable for all companies. As well as the current level, the ratio should be evaluated in terms of its trends, and compared with the company’s competitors. If there is a spike in the debt levels, it is important to try to find out why this is the case.
Within Conscious Investor you might consider moving the Financial Slider further to the left to allow through more companies at the initial stage. Then analyze their debt more closely during the Quick Analysis.
