This is the essence of quality and safe investing.
Do you always avoid all companies with large amounts of debt?
When larger debts are not a problem
There are some companies which can cope with higher levels of debt and still potentially make good investments.
These are companies with very stable and predictable profits and cash flows.
They have consistently high debt to total asset ratio and quite low levels of interest cover, and yet, they have many of the hallmarks of a quality company.
- grown their sales, profits (EBIT) and free cash flows,
- whilst maintaining high profit margins (EBIT margins) and
- very good levels of ROCE.
The general point is: if a company shows it can continue to increase turnover and EBIT - sales and profit - year after year, whilst holding high levels of debt, this can still be regarded as a quality company and potentially a good investment.