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Just curious as to who utilzes debt as a fundamental when doing stock reserach. I know this plays into some well known strategies, but it'd be interesting to hear how everyone else utilizes it if at all. Personally I free debt to be less than 1%, but it really depends on the play that I am going for.
A company with a lower D/E will have less volalitle earnings over a given period compared to a company with higher D/E ratio.
lower D/E ratio: 32 cents to 35 Cents per share
Same company higher D/E ratio: 28 cents to 39 cents per share.
the whole concept take about a page to fully expalin, but if your interested Check out "Finance" a Barrons review book. It's Green and sold at almsot every book store that has a finance section.
There's good and bad to this aspect, but it's always something top keep in mind.
A company with too high a debt ratio could find it difficult to obtain additional funds needed and may have their net income eaten away by interest payments. However, a company with very low debt may not be leveraged enough and could also be watering down current holders' stakes through excessive equity financing.
I use D/E very extensively it is one of my main considerations when I am looking at a long position. Depending on the industry I like to see it at one or less. I like to look at the debt level historicaly as well and if it has been increasing over the last five years then I lose interest in the stock if it has gone down I become more interested. Leverage is a great tool but if that is the only tool you have then you may not survive long in business. But as mentioned some industries have large D/E like utilities. When it come to indutries like that I readjust my standards. In anycase even with a utility I will not go more than D/E of 2. It must be an attractive bargain for that kind of D/E. As for short term and technical trading I do not think it has much effect, although I can see it must have an effect on volitilty in certain industries. I use other indicators in my research and will stay interested in a company if there are enough positives to outweigh the high debt. One of these factors that I will consider will be mangement. If a new CEO comes out and says the company is going to reduce debt and says how he plans to do it this might be enough to keep my attention. In general I would say the D/E is about 15-25% of the weight when I am looking for a long term investment. One key number I like to see is the industry average D/E in order to have a comparison.
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