Should you invest in companies with too much debt?
Would you lend money to a friend who had little income and was swimming in debt? Of course not, because the likelihood of you getting your money back would be extremely low. The same is true for investing in companies which have high debt.
Too much debt = unable to survive recessions
A company with high debt is going to have a hard time paying back its loan if the economy starts to sink. Companies with high debt will have a difficult time surviving downturns. We know from experience that downturns in the economy do occur, but no one know when.
In the Simply Investing Report we track over 210 companies each month and we look at the Long-term Debt to Equity Ratio = (Long-term debt) / (Shareholder’s Equity). Here are some companies with high debt right now:
- Boeing 11792%
- Lowe's 445%
- Clorox 340%
- Hershey 311%
Contrast the above large debt numbers with companies like:
- Abbott 0%
- Chevron 0%
- Johnson & Johnson 0%
- Rollins 0%
Make better investing decisions
All things considered equal you should invest in the company with lower debt. Lower debt is one of the factors that demonstrate that a company is financially healthy and properly managed.
No one knows when the next recession will come, but financially healthy companies will be better suited to survive any economic downturn.
“I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable."
– Warren Buffett
I'm here to help
In addition to looking at a company's debt level, there are 11 other simple metrics to watch. I can help you to start investing today, why re-invent the wheel when you can learn from my 20-years of being in the stock market. I've witnessed first hand the ups and downs of the market, and I know what it's like to start investing your hard earned money. I created the 12 Rules of Simply Investing to help you get started right away, and start earning more income for yourself.
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