2006-07-21 16:58:27 · 8 answers · asked by Alien3 2 in Social Science ➔ Economics
If you are an investor, you would question the effectiveness of the company's management. Here's why, if they can't give you a return on your equity greater than what you could get by loaning it out, then they lack any ideas and you should by debt since you have somewhat more security.
So, when you look at a firm, you look at their ROA (Return On Assets) and it should be higher than what they could borrow money for.
Firms usually structure their capital half debt and half equity thanks to economies that they experience from that ratio.
One more reason that publicly traded firms keep debt is to prevent hostile takeovers, although I'm not sold on the idea that takeovers are a bad activity. Management may be under performing, and again, not arbitraging debt for a higher return from operations is a reason that management gets canned from shareholders as it is a cause of under performance.
Debt is not bad, it is a tool. Debt is a problem when servicing it impedes cash flow, which will kill a firm.
For all you still hugging that teddy bear belief that "too much debt" causes bankruptcy; once again and more clearly:
It's the service on the debt, which is controlled by magnitude of debt AND interest AND repayment terms.
Bottom Line:
A STUPID COMPANY HAS NO DEBT.
A REALLY STUPID COMPANY HAS NO DEBT AND A LARGE CASH POSITION.
2006-07-21 17:31:32 · answer #1 · answered by bizsmithy 5 · 0⤊ 0⤋
It's a fake, a fraud, a come-on. Debt is part of the process of being successful. Absence of debt indicates the company itsself is not real. In the real world, the only problem is unpaid debt and the absence of sufficient resources with which to pay the debt.
2006-07-22 00:06:36 · answer #2 · answered by Anonymous · 0⤊ 0⤋
Assuming you're referring to the idea of stock investments of a company running with NO overhead.
All businesses have some degree of cost overhead--otherwise they wouldn't go public and seek stockholders. Good detective work in the company's inner business, it's product(s), principal stock price yield for however it's best measured will be your best guide. A trusted business stock advisor can help you with your investigation.
Remember: if it sounds too good to be true: it is--and best avoided.
2006-07-22 00:05:51 · answer #3 · answered by Mr. Wizard 7 · 0⤊ 0⤋
Maybe! It depends on many factors. Leverage (creating debt) can be useful in expanding a business.
2006-07-25 13:01:19 · answer #4 · answered by Anonymous · 0⤊ 0⤋
Its definetly a good sign that they are doing well. Doesnt mean everything they do is good. What company?
2006-07-22 00:02:00 · answer #5 · answered by Anonymous · 0⤊ 0⤋
Its odd.. because all great companies always owe something to someone.
2006-07-22 00:03:08 · answer #6 · answered by Latin Princess 2 · 0⤊ 0⤋
No
it may mean they cannot aquire loans
or
they do not know how to use other peoples money
2006-07-22 00:07:00 · answer #7 · answered by mike c 5 · 0⤊ 0⤋
Yeah.
2006-07-22 00:01:16 · answer #8 · answered by Anonymous · 0⤊ 0⤋