Why Debt-Equity Ratios Matter to Growth Investors

Debt plays an important role in analyzing the profitability and performance of a publicly held company. Although a certain degree of debt is not necessarily a bad thing, companies that rely on debt for their daily operations place themselves in a vulnerable situation, opening up the possibilities of bankruptcy. Due to this, analysts and growth investors use the debt- equity ratio of a company to gain insight into its solvency and financial condition.

Debt- Equity Ratio Explained

The debt- equity ratio essentially measures how reliant a company is on debt. To calculate the ratio, investors simply divide the total debt of a company by the total amount of shareholder equity. To gain a truly accurate depiction of the true total debt held by a company, any off of the balance sheet liabilities, such as health benefits and employee pensions, as well as any interest- bearing leases that can be found in the footnotes of a financial statement should also be taken into consideration.

According to www.smallbusiness. wa. gov, the higher the debt- equity ratio, the more reliant on debt a company is to finance its operations, which increase risk to lenders. A 1: 1 debt- equity ratio indicates that the shareholders and the lenders bear the same amount of risk.


The debt- equity ratio of a company says quite a lot about its risk level. Companies with high debt levels are usually leveraged to the hilt, and may provide investors with larger returns. However, high debt levels also leads to a higher amount of interest that must be paid on loans, creating possible financial difficulties.

Typically, conservative growth investors, such as Warren Buffet, prefer companies with lower debt levels. The return on equity may not be as great, but the company may be more stable and have increased access to debt and equity markets for future growth and expansion.

Risks Associated with High Debt Levels

High debt levels can significantly cut into the profits of a company. Unlike equity, which is only paid out when a company reaches profitability, debt financers demand consistent payments with defined interest rates. Therefore, high debt levels can cause a company to devote a substantial amount of potential profits to paying interest on their debts. Without the debt, the money can go towards shareholder dividend payments or company expansion.

It is difficult to ascertain the exact level of returns that are needed to spur shareholder investment. There are several models that investors use to estimate this amount, but most of these models use a combination of the risk and returns of similar companies and interest rates. In most cases, in order to justify investment, the level of return must be higher than the company’s debt interest rates.

Access to Capital Markets

Disproportionately high debt levels can increase the difficulty of receiving new business loans or attracting new investors. In the eyes of lenders, extremely high debt levels increase the risk of default on future loans, making them less likely to approve new loans and more likely to raise interest rates on existing loans. Similarly, the increased risk associated with high debt levels often requires potential investors to seek higher returns.

Expert Insight to Growth Investing

Successful buy- and- hold growth investors, such as Warren Buffet, encourage the notion of avoiding companies with high debt levels. Buffet and many others understand that leverage can increase a company’s return on equity, but due to the potential long- term consequences of high debt levels, they recommend putting their investment dollars into companies with low debt- equity ratios and strong balance sheets. While some investors take the opposite approach, seeking higher potential profits.

Mistakes to be avoided by debt ridden people in order to become debt free

For people looking to come out of the debt trap, there are certain things that need to be followed. But very often they don’t take these steps and perform mistakes like:


  • Not putting down all their goals in writing. The goals should have ideally included the duration within which the person wants to become completely debt free. For Example, the goal can be like, ” I want to become completely debt free by the end of 2013 “. The person should also document the steps that are being planned to become debt free. But most of the debt ridden people do the mistake of not writing down the goals
  • Do not get rid of the credit cards. There is no way the person can become debt- free, if they are in possession of a credit card or two.
  • Continue making lavish spending such as subscription to premium channels on satellite channels and going on weekly outdoor lunch with the family.
  • Not taking the help of a good debt relief company to become completely debt free. Often debt- ridden people depend on the credit company to lower their interest rate on the outstanding amount.
  • Not realizing that it would take time to come out of the debt trap

By avoiding these mistakes, the debt- ridden person can quickly come out of the debt trap and become debt free over a period of time.

The Best Way to Choose a Payday Lender

People who are looking for loans in Hamilton, Ontario have probably considered payday loans as a way to help them with unexpected expenses. Do not make the mistake of picking the first payday loan service that you come across. All payday lenders are not created equal and you should do your research before you choose a payday lender.

A payday loan is a loan that you get by proving to a lender that you have some form of regular income. The lender will then give you the cash until you get your paycheck. Many people use payday loans for a variety of different reasons. Most often, there is some kind of money emergency that people are experiencing when they decide to get a payday loan.

When you are picking a payday lender, you will want to make sure that you know what requirements the lender has. Some lenders have different qualifications and requirements for giving payday loans. You will need to have a job to get a payday loan. Also, you will be required to have a checking account to get a payday loan. Having your paycheck directly deposited is another common requirement of payday lenders. The next thing you will want to find out is how much the loan is going to end up costing you. You have to take into account interest and fees when using a payday lender. Be sure that you read the fine print on any loan because you don’t want to be hit with fees that you weren’t aware of. While the Ontario government has done a lot to curb the excesses of payday lenders, they are still out to make money so you must be careful.

Sell Your House Yourself and Save Money

2Why would you take the trouble of selling your house yourself when you can get it done through a real estate agent? The reason here is that you can save substantial amount of money in this process. Having said that, do not think that you can save the entire amount of commission that you would have otherwise paid to your agent.

When you do the selling yourself, you have to spend some of your own time in collecting information related to house selling and for getting more involved in the process. You can get information about current market price by browsing internet sites such as Realtor. ca, ComFree or ByTheOwner. Please check the time period for which the house is on the market along with its asking price. This gives you a fair idea whether the house price mentioned is proper or not.

When you avoid real estate agents, you lose the huge market which they serve. So you might have to keep your house price slightly less than the current market price. Another drawback in this scenario is that you have to be available to show your house to prospective buyers. This might consume a lot of your time. Again, if you are not available at a time convenient to the buyers, you might loose good chances of selling.

Still, if you are ready to do your homework and have some time to spend, going for selling yourself is worth a try. Besides saving money, you might enjoy and learn something from the whole process.