We should steer clear of businesses that are highly indebted, since they can negate our estimates of future earnings.
Debt improves the return on capital, but the increased volatility from interest payments can become impossible to bear.
The limit for acceptable levels of debt depends on the stability of the business; the more stable - with an easy to predict outlook (toll road, electricity networks, etc.) - the more manageable the debt.
The undeniable advantage of working without debt or other liabilities is that we can withstand any situation with the necessary peace of mind.
Debt requires us to be more precise with our predictions that is desirable, especially given the near impossibility of correctly forecasting what will happen and the inevitability of devastating surprises.
Although indebtedness doesn't directly impact on the valuation, it is important to be very aware of a company's debt levels, analysing its capacity to pay back debt: size, term, restrictions, etc.
Debt improves the return on capital, but the increased volatility from interest payments can become impossible to bear.
The limit for acceptable levels of debt depends on the stability of the business; the more stable - with an easy to predict outlook (toll road, electricity networks, etc.) - the more manageable the debt.
The undeniable advantage of working without debt or other liabilities is that we can withstand any situation with the necessary peace of mind.
Debt requires us to be more precise with our predictions that is desirable, especially given the near impossibility of correctly forecasting what will happen and the inevitability of devastating surprises.
Although indebtedness doesn't directly impact on the valuation, it is important to be very aware of a company's debt levels, analysing its capacity to pay back debt: size, term, restrictions, etc.
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