Joseph_B._Wirthlin called debt a " a financial termite! I usually check the PE of a share, and then ROE and ROCE. But then on the spur of a moment, I decided to search for a screen for low-debt companies. It does exist. And to my pleasant surprise, many of them appear good on my other favourite parameters too.
That’s always my first criteria. I generally put D/E less than 0.3. Other non negotiable criteria are promoter holding greater than 50% (skin in the game) and pledged percentage = 0.
I actually posted some bits of my investment journey here :
Never paid focus and attention to my investments till now. It was just a sideline activity. But now seriously looking into it and have done a lot of changes into it. Hopefully, will have some good returns over next few years.
Most companies need debt either for long term needs or for working capital. Some are using debt because cost of debt is lower and they can re invest surpluses at better rates
some companies use low rate of interest as a competitive advantage …
service based companies need little or no debt.
Consumer companies need debt in their first 10 years of existence and after that they are pretty much debt free …
There are parameters like Debt service coverage ratio and Interest coverage to check…
I tend to avoid these very extreme observations. A recent high court called people arrested by police with small quantities of narcotics as " termites " to whom no mercy should be shown.
In India we have come a long way since the 70s and 80s when almost all projects were bank or institution funded .
Today long term lending by institutional funding is almost dried up. . Industries where debt funding is needed where working capital or fixed capital needed yes. in such cases ROCE should be used to understand efficiency of capital used Other capital light industries … we need to use ROE.
This is a standard interview question I used to ask fresh Chartered accountants looking for first jobs. They would just repeat the formula and expect that be a right answer !!
