Brad:
At 02:33 PM 8/4/2005, you wrote:
I take a slightly different view. If I am analyzing two fairly equal
companies, except one had more long term debt, I am going to really
consider the low debt or debt free company.
It works that same as it does for consumers. Some folks don't mind
multiple credit cards, two car loans, perhaps a student loan, and a
mortgage. (Then they wonder why they aren't saving for retirement or
their kid's college.) Their cash flow is lower, but they have invested in
"capital equipment" like cars and a house.
I would have to take issue with the comparison between a company's
use of debt and that of a consumer. A company will make use of debt
when it can earn more with the assets the debt purchases that it costs
to service that debt. This is the criterion management uses to justify
borrowing the money. This is called leverage; and it's a way of making
the shareholders' interest in the company more productive.
Management walks a fine line between maximizing the return to the
shareholders (which using other people's money does) and the potential
vulnerability it can cause should there be a downturn in the economy
that might make the debt service too onerous. That's what they get
paid for.
Again, if we don't understand the dynamics of debt management, we
really don't need to worry about the company's debt if the track record
of sales and earnings over a sustained period of time shows management
to be capable of handling it.
Ellis Traub
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