Good Debt vs Bad Debt vs Ugly Debt

Britain becomes a nation of debt slaves as regulation and inflation deter saving

Britain becomes a nation of debt slaves as regulation and inflation deter saving

By Ian Cowie Your Money Last updated: February 27th, 2012

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Britain's households are drowning in debt

Now that interest on debts absorbs nearly a quarter of British households’ net income, according to the Consumer Credit Counselling Service (CCCS), many families are discovering how cruel a taskmaster compound interest can be.

If you think conventional savings products – like pensions and managed funds – provide poor value, then just wait till you see how bad the ‘returns’ on borrowing are. While instant gratification has come to be regarded almost as a ‘yuman right’ in the credit-fuelled consumer societies of the developed world, the costs of that delusion will mount over the decades ahead. Worse still, the Government is actively encouraging young people to take on massive debts before they have any means of repaying them.

Even at today’s low rates of interest, debt that is allowed to accumulate on debt will often roll up faster than the debtor’s ability to repay it. For example, anyone who borrows £10,000 at a typical mortgage rate of 3.5 per cent will repay a total of very nearly £15,000 over the standard 25-year term.

Not many students today have heard of the ‘Rule of 72’ but more are likely to take an interest in future. This is the easy way of calculating how long it will take a debt to double; you just divide the annual rate of interest into 72 to arrive at the number of years. Albert Einstein is reported to have described compound interest as “the most powerful force in the universe” – and students in future could be forgiven feeling that questions about the accuracy of this quote are academic.

Sadly, savers have been so badly treated in Britain for so long that it is not hard to see why many have decided prudence is not worth the bother. Millions of people who set aside something for a rainy day in bank and building society deposits have seen the real value of their savings – their purchasing power – steadily shrunk by the Government’s undeclared policy of running negative real interest rates.

The average easy access savings account has lost nearly £2,500 of its real value or purchasing power during the last decade, according to calculations last year by Yorskhire Building Society. Inflation is the insidious enemy of savers because it stealthily reduces what their money will buy. But with the Government’s favoured yardstick, the Consumer Prices Index (CPI) and the Retail Prices Index (RPI) running in low single figures, many may underestimate the cumulative threat.

Simon Broadley of Yorkshire Building Society said: “With the average savings account standing at £11,648 this can have a significant effect on a person’s savings – especially over the long-term, given the current market.

“Over 10 years someone with the typical savings pot in a basic easy access savings account would have earned £1,624 in interest, leaving its nominal value at £13,272. However, for them to have the same spending power as when they invested – their savings would need to have grown to £15,700 – a difference of £2,428.”

No wonder Britain has turned from being a nation of savers to a nation of borowers. Regulatory requirements mean it takes hours to start a pension savings plan but just minutes to take out a credit card. After more than a quarter of a century of extensive and expensive regulation of financial services, the net effect has been to replace poor value retail savings products with even worse value retail credit.

http://blogs.telegraph.co.uk/finance/ianmcowie/100015239/britain-becomes-a-nation-of-debt-slaves-as-regulation-and-inflation-deter-saving/

WHAT WARREN BUFFETT SAYS ABOUT DEBT

Warren Buffet acknowledges that debt can effectively increase the return on equity in a company but warns against it. In 1987, he said this:

‘Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage.'

'It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant.’

WARREN BUFFETT DOES NOT LIKE DEBT

Warren Buffett does not like debt and does not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.

• In 1982, Warren Buffett noted that Berkshire Hathaway preferred to buy companies with little or no debt and has repeated this mantra on many occasions. 
• He adopts the same philosophy for his company, preferring to avoid debt but where necessary going into it on a long-term basis only with fixed rates of interest and to obtain the finance before they need it.

Warren Buffett and Long-Term Debt

WARREN BUFFETT AND LONG-TERM DEBT

Warren Buffett speaks only generally of his approach to debt. Mary Buffett and David Clark have concluded that he focuses on long-term debt, a conclusion that is supported by his public comments. They believe that his concern lies with the company’s ability to repay its debts, should the need arise, from its profits; the longer the time period, the more vulnerable is the company to external changes and the less predictable are its future earnings.

The formula for such a calculation is:

Number of years to pay out debt = Long term debt
                                                 Current annual profit

COMPANY EXAMPLES

If we apply this formula to Johnson and Johnson, for example, we find, using Value Line, that for 2002, the long-term debt of the company was $2022 million and the profit for that year was $6610 million. Dividing the first figure by the second, we can calculate that at that rate the company could pay off its long-term debt in 0.3 of a year.

If we apply the same formula to McDonald’s Corporation, we find, using Value Line, that for 2002, the long-term debt of that company was $9703 million and the profit for that year was $ 1692 million. Dividing the first figure by the second, we can calculate that at that rate the company could pay off its long-term debt in 5.73 years.

When to choose bankruptcy over debt management

By Steve Bucci

Dear Debt Adviser,
I have more debt than I can handle, and I am enrolled in a debt management plan. However, my expenses still amount to more than I bring home, and the debt management agent knew this going in. They calculated my debt payment as $344 with the program, and they never advised as to whether I should file for bankruptcy. Should I have filed for bankruptcy instead? If I file for Chapter 7, would I have to include all of my debt including personal loans? 
-- Shirley

Dear Shirley,
Slow down, Shirley! You have a lot going on here, so let's take things one at a time. First, you should not have been enrolled in a debt management plan if your income level does not allow for the monthly payment. Call the debt management agency as soon as possible, and ask to speak with a supervisor. Have them go over your case from start to finish. If a mistake as big as putting you in an unaffordable plan was made, other issues may have been overlooked as well. Find out if your payment can be lowered to what you can afford. Many agencies can offer a hardship debt management plan titled a "call to action," which lowers the interest rate on your credit card accounts to the lowest possible level. That may decrease your monthly payment enough to make the debt management plan work for you.

A reputable credit counseling agency will not enroll persons in a debt management plan unless the counselor has provided a spending plan that balances income and expenses. If you are having trouble meeting your monthly payment because you are not following the spending plan provided by the agency, then you have a decision to make. Either get back on track and spend only as the plan allows, or increase your income with a part-time job or other income source.

Second, as for bankruptcy advice, I'm not surprised the counselor didn't give you any. Only an attorney can give legal advice, and bankruptcy is a legal process. However, your counselor can and should go over the pros and cons of filing for bankruptcy and whether it would make sense for you to get a legal opinion for your particular situation.

Third, should you find you absolutely cannot afford to make your payment and want to explore bankruptcy, I recommend you contact an attorney who specializes in consumer bankruptcy. To qualify for a Chapter 7 filing (in which your debts are forgiven and not repaid) your income must be below the median income for your state.

You would typically include all your debt in a bankruptcy filing, but you can file a reaffirmation document for a particular debt(s) if you have a good reason for doing so. You and your attorney will have to sign the reaffirmation document that states you can afford to repay the debt and it will not be an undue hardship on your post-bankruptcy budget to continue to pay the debt you would like reaffirmed. Typically, unsecured debts would not be included in a reaffirmation, which would include personal loans. Most reaffirmations would be for car or mortgage loans. I'm not sure why you would want to reaffirm a personal loan, but if you can convince the court and your attorney that it would be in your best interest to do so, you could file a reaffirmation for the debt.

Lastly, you wanted to know if you should have filed instead of going on a debt management plan. My answer is that if the debt management plan can be made to work, you are usually better off. A bankruptcy can stay on your credit report for up to 10 years. A poor credit report may affect your ability to get a decent apartment, home or insurance for years to come. If you have no other way out, then you may have no choice but to file. Just be sure you consider all the potential ramifications before you decide.

Read more: When To Choose Bankruptcy Over Debt Management | Bankrate.com http://www.bankrate.com/finance/debt/choose-bankruptcy-over-debt-management.aspx#ixzz1hOvuZp5p

There are four ways to protect yourself from the current economic turmoil.

Paying for a cult of risk
Anneli Knight
November 23, 2011

Money extremes … governments need to create policies to avert further financial woe. Photo: Reuters

There are four ways to protect yourself from the current economic turmoil.

The former derivatives trader who in 2006 predicted the global credit crisis, Satyajit Das, says the world economy will continue to deteriorate unless international policymakers co-operate. Either way, he says, we're heading for dramatic change and offers a few tips on how to weather the storm.

In his book Extreme Money: The Masters of the Universe and the Cult of Risk, Das has coined the term ''extreme money'' to refer to the ''process of financialisation'' that has underpinned the banking sector and global economics throughout the past 40 years.

''Money was always a medium of exchange, a store of value but, essentially, what happened in the last 40 years is that it changed … and became the driver of economies,'' he says.

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Das says this process made borrowing a key driver of growth. ''You end up with this situation of pure speculation as a way of making money - we like to call it investment.''

His book chronicles the recent history of banking and the way it has shifted from a simple era - in which banks existed to borrow and lend sensible amounts, offer convenient and safe payment mechanisms such as credit cards and help manage risk with products such as insurance - up to the current state of chaos.

''Extreme Money spans this period and tries to turn out every little piece, which on its own looks fine, but when you add them all up it's this horrific tale of how we deluded ourselves for over 30 or 40 years.''

Das says governments are in denial about the huge co-operative effort required to avoid turmoil. ''We've been trying to defy financial gravity; the question is: do we come down in a gentle control glide or do we just crash?''

Proactive and aggressive policies taken by global leaders are required to cushion the landing, Das says, acknowledging the inherent challenge in garnering international agreement on policies that will bring pain.

''There's huge denial because if people want to confront this they'll have to unravel a lot of things they've put in place over the last 30 years, which would mean lower living standards, which, in my view, is inevitable anyway.''

Regardless of the approach world leaders take, Das says, individuals can begin to take steps now to cushion their own financial circumstances.

TAKE CHARGE

Taking the time to understand your investments is crucial, Das says. ''You're the only person who can make a decision about what you're comfortable with,'' he says. ''We've just delegated that to other people - funds managers, advisers - and generally, on average, they've not done a great job. There's also a conflict of interest because that person will always think their product is the best, naturally, even if it's not best for you.

''People have just walked away from trying to understand this, which is crazy because it's a very important part of your life. You have to understand this because otherwise you'll pay for this and you'll pay for this with your hard-earned cash.''

REDUCE DEBT

Das forecasts borrowing costs may increase and it will be more difficult to secure a loan as the debt problems in Europe spread to the US and Japan and make it more difficult for Australian banks to lend from overseas. In a time of higher risk, higher cost and less availability of funds, you should reduce your debt, Das says. ''Essentially, reducing your debt means cutting your mortgage, or, if you have a business, reduce the debt as quickly as possible.''

SAVE MORE

''We're entering a period of lower returns, which means we need to save more,'' Das says.

''Individuals are going to need a lot more savings than they imagined because what Australians have relied on are two things: the value of their houses, which is a complete illusion because your house is not an investment, it is where you live. And the other savings are superannuation but the problem is your retirement savings are not earning enough to give you a reasonable lifestyle at retirement. Retirement savings earnings are pretty abysmal and they're not going to go up - if anything they're going to be lower.''

As the global economy changes to a more realistic situation, Das says the Australian government will be forced to pull back funding for services such as education, health and aged care.

''You are going to need more of your personal resources to pay for all these things than you imagined because governments can't afford to pay.''

SEEK CAPITAL SECURITY

With a forecast of low growth and high risk, Das says investors should seek secure investments with a focus on income rather than capital gain.

''You really need to get investments which provide you with income you can live on,'' he says. ''If you have money to invest, make sure the money you have is protected. That will be very important.''

Key points

Satyajit Das recommends four ways to protect yourself:

❏ Take charge of your own finances.

❏ Reduce your debt.

❏ Save more.

❏ Be concerned with capital security and income rather than capital gain.

Satyajit Das's book Extreme Money: The Masters of the Universe and the Cult of Risk is published by Portfolio (Penguin, $32.95).

Read more: http://www.smh.com.au/money/planning/paying-for-a-cult-of-risk-20111122-1nrfd.html#ixzz1eXknG4Ce

Wednesday March 30, 2011

Don't over-borrow

Plain Speaking - By Yap Leng Kuen

ALTHOUGH only two restrictions have been placed on borrowing for the purchase of a third or more homes and credit card eligibility, it does not mean that there won't be more to come.

In fact, consumers should be vigilant as Bank Negara is believed to be putting more intensive supervision on certain aspects of the property and personal loans sectors.

For example, the 5:95 property loan scheme offered by certain companies falls under this category of supervision.

Under this arrangement that was implemented during the market doldrums, only 5% downpayment was required for the purchase of a property with the rest of the financing in the form of a bank loan.

There was talk that the 5:95 scheme was mainly extended to affluent housebuyers but the bulk of the repayments are coming onstream this year. Hence, the monitoring of these repayments as well as pockets of borrowing that are still available under this scheme.

Personal loans form 15% of the total loans portfolio but due to the higher borrowing rates, extra care and discipline are required to guard against over-borrowing.

The extension of credit by non-bank institutions is also being monitored amidst lessons gleaned from countries suffering from high indebtedness.

Credit schemes extended by cooperatives and cooperative banks are likely to be scrutinised for affordability on the part of the borrowers.

Covering all aspects of household loans, the upcoming guidelines on lending and affordability represent part of the internal controls that are put in place to monitor the situation.

Under this surveillance, over-lending to single borrowers is discouraged.

In fact, the entire credit scenario is being assessed via a holistic package of policies and measures that cover prudential, intensive supervision, standards on banking institutions and consumer education.

Household indebtedness, at 75.9% of Gross Domestic Product at the end of last year, may be on the increase but indications are that it has not become destabilising.

On the contrary, wealth accumulation remains healthy with liquid assets forming 64% of financial assets while delinquency levels remain low - the non-performing loans for credit cards is at 2%.

Nevertheless, it is not a time to be sanguine especially when high energy and commodity prices pose risks to the economy.

Senior business editor Yap Leng Kuen views this an opportune time to remind everyone that “prevention is better than cure.''

http://biz.thestar.com.my/news/story.asp?file=/2011/3/30/business/8375253&sec=business

ROA And ROE Give Clear Picture Of Corporate Health

by Ben McClure 

With all the ratios that investors toss around, it's easy to get confused. Consider return on equity (ROE) and return on assets (ROA). Because they both measure a kind of return, at first glance, these two metrics seem pretty similar. Both gauge a company's ability to generate earnings from its investments. But they don't exactly represent the same thing. A closer look at these two ratios reveals some key differences. Together, however, they provide a clearer representation of a company's performance. Here we look at each ratio and what separates them.

ROE
Of all the fundamental ratios that investors look at, one of the most important is return on equity. It's a basic test of how effectively a company's management uses investors' money - ROE shows whether management is growing the company's value at an acceptable rate. ROE is calculated as:

Annual Net Income             Average Shareholders' Equity

You can find net income on the income statement, and shareholders' equity appears at the bottom of the company's balance sheet.

Let's calculate ROE for the fictional company Ed's Carpets. Ed's 2009 income statement puts its net income at $3.822 billion. On the balance sheet, you'll find total stockholder equity for 209 was $25.268 billion; in 2008 it was $6.814 billion.

To calculate ROE, average shareholders' equity for 2009 and 2008 ($25.268bn + $6.814bn / 2 = $16.041 bn), and divide net income for 2009 ($3.822 billion) by that average. You will arrive at a return on equity of 0.23, or 23%. This tells us that in 2009 Ed's Carpets generated a 23% profit on every dollar invested by shareholders.

Many professional investors look for a ROE of at least 15%. So, by this standard alone, Ed's Carpets' ability to squeeze profits from shareholders' money appears rather impressive. (For further reading, see Keep Your Eyes On The ROE.)

ROA
Now, let's turn to return on assets, which, offering a different take on management's effectiveness, reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank, accounts receivable, property, equipment, inventory and furniture. ROA is calculated like this:

Annual Net Income             Total Assets

Let's look at Ed's again. You already know that it earned $3.822 billion in 2009, and you can find total assets on the balance sheet. In 2009, Ed's Carpets' total assets amounted to $448.507 billion. Its net income divided by total assets gives a return on assets of 0.0085, or 0.85%. This tells us that in 2009 Ed's Carpets earned less than 1% profit on the resources it owned.

This is an extremely low number. In other words, this company's ROA tells a very different story about its performance than its ROE. Few professional money managers will consider stocks with an ROA of less than 5%. (For further reading, see ROA On The Way.)

Watch: Reture On Assets

The Difference Is All About Liabilities
The big factor that separates ROE and ROA is financial leverage, or debt. The balance sheet's fundamental equation shows how this is true: assets = liabilities + shareholders' equity. This equation tells us that if a company carries no debt, its shareholders' equity and its total assets will be the same. It follows then that their ROE and ROA would also be the same.

But if that company takes on financial leverage, ROE would rise above ROA. The balance sheet equation - if expressed differently - can help us see the reason for this: shareholders' equity = assets - liabilities. By taking on debt, a company increases its assets thanks to the cash that comes in. But since equity equals assets minus total debt, a company decreases its equity by increasing debt. In other words, when debt increases, equity shrinks, and since equity is the ROE's denominator, ROE, in turn, gets a boost. At the same time, when a company takes on debt, the total assets - the denominator of ROA - increase. So, debt amplifies ROE in relation to ROA.

Ed's balance sheet should reveal why the company's return on equity and return on assets were so different. The carpet-maker carried an enormous amount of debt - which kept its assets high while reducing shareholders' equity. In 2009, it had total liabilities that exceeded $422 billion - more than 16 times its total shareholders' equity of $25.268 billion.

Because ROE weighs net income only against owners' equity, it doesn't say much about how well a company uses its financing from borrowing and bonds. Such a company may deliver an impressive ROE without actually being more effective at using the shareholders' equity to grow the company. ROA - because its denominator includes both debt and equity - can help you see how well a company puts both these forms of financing to use.


Conclusion
So, be sure to look at ROA as well as ROE. They are different, but together they provide a clear picture of management's effectiveness. If ROA is sound and debt levels are reasonable, a strong ROE is a solid signal that managers are doing a good job of generating returns from shareholders' investments. ROE is certainly a “hint” that management is giving shareholders more for their money. On the other hand, if ROA is low or the company is carrying a lot of debt, a high ROE can give investors a false impression about the company's fortunes.

by Ben McClure (Contact Author | Biography)

Ben McClure is a long-time contributor to Investopedia.com.

Ben is the director of Bay of Thermi Limited, an independent research and consulting firm that specializes in preparing early stage ventures for new investment and the marketplace. He works with a wide range of clients in the North America, Europe and Latin America. Ben was a highly-rated European equities analyst at London-based Old Mutual Securities, and led new venture development at a major technology commercialization consulting group in Canada. He started his career as writer/analyst at the Economist Group. Mr. McClure graduated from the University of Alberta's School of Business with an MBA.

Ben's hard and fast investing philosophy is that the herd is always wrong, but heck, if it pays, there's nothing wrong with being a sheep.

He lives in Thessaloniki, Greece. You can learn more about Bay of Thermi Limited atwww.bayofthermi.com.

Filed Under: Accounting, Fundamental Analysis, Investing Basics, Stock Analysis, Stocks

http://www.investopedia.com/articles/basics/05/052005.asp

A quick look at Nam Fatt - PN17 (1.5.2010)

Nam Fatt Corporation Berhad Company

Business Description:
Nam Fatt Corporation Berhad. The Group's principal activities are constructing bridges, heavy concrete foundations, roads, factory complexes and other similar construction activities. Other activities include building, maintaining and operating the Jiangjin Bridge on a built-operate-transfer basis, constructing projects in the oil, gas and petrochemical related industry, steel fabrication, structural steel engineering, manufacturing and trading steel doors and industrial boilers, researching, developing, producing, selling, installing and maintaining metal roofing and wall cladding, manufacturing galvanised iron roofing sheets, property development; owning and developing golf resort and its recreational amenities, property developer and property manager, resort and development, managing a golf resort and recreational clubs and investment holding. The Group operates in Malaysia, Africa and Asia.

Currency: Malaysian Ringgits
Market Cap: 28,763,370
Fiscal Yr Ends: December
Shares Outstanding: 319,593,000
Share Type: Ordinary
Closely Held Shares: 35,229,890 (11%)

16/03/2010
NAMFATT - New admission into PN17

Wright Quality Rating: LCNN Rating Explanations








A quick look at Nam Fatt - PN 17 (1.5.2010)
http://spreadsheets.google.com/pub?key=tAskkNgs3uU8eyk_WrTFcSw&output=html

Some RED FLAGS (hindsight) in the accounts of Nam Fatt at end of 2008 to note are:

Share price 
RM 0.19  or market capitalisation of 34.16 m. (The price rose to RM 0.30 from March 2009 and dropped precipitously to RM 0.09 when the news of the company's financial problem was known.)

Income statement
Negative earnings -14.09 m
Interest expense -18.73 m

Cash flow statement
Negative CFO  -41.27 m
Neglible CFI
Negative FCF  -44.10 m
CFF  -34.11 m (Borrowings increased significantly)

Balance sheet
Total Debt 499.69 m
Account Payables' Days 206.58 days  (This then increased to 714.24 days in end of 2009)
Interest cover 0.66
Total Debt/Equity 0.82
Net Debt to EBITDA 26.64  (Ideally, this should be less than 5.  Bankers do not lend if this ratio exceed this figure.)

Of interest, these commonly used parameters DID NOT raise any red flags at end of 2008:

Equity 607.44 m (What is the actual value?!)
NAV 1.59
Current ratio 1.54
Quick ratio 1.51
Account Payables' Days 82.22 days (Though this subsequently ballooned to 307.08 days in end of 2009)
LTD/Equity 0.34
Dividend 2.08 m


Related article:

Measure long-term solvency and stability

Assessing indebtedness. How much debt is too much?

Acceptable debt

Debt and Leverage: Financial weapon of mass destruction

Be fearful of excessive leverage and debt

Buying Stocks on the Verge of Bankruptcy

8 Signs Of A Doomed Stock

Red Flags and Pitfalls for Avoiding Financial Fakery

Asset valuation approach in liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value. 

• Cash and securities are taken at face value.
• Receivables require a small discount (perhaps 15 percent to 25 percent off).
• Inventory a larger discount (perhaps 50 percent to 75 percent off).
• Fixed assets at least as much as inventory.
• Any goodwill should probably be ignored.
• Most intangible assets and prepaid expenses should beignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.