Measuring / comparing cash & debt for companies...

[CRHawk]

I want to look at debt when I am comparing the quality of companies and looking to invest in higher quality companies.

 

So far, the method I like the best is to compare debt and and cash to yearly earnings.  I would think this measures a companies ability to pay down debt if it wants to/ needs to.

 

So...  (Numbers based upon Value Line reports)

 

JNJ is about 1 x E for debt, and about 2.5 x E in cash.  Great!

 

AMGN is about 3.5 E for debt, and about 4 x E for cash.  Nice.

 

AGN is about 8 x E for debt and about .2 x E for cash.  RED ALERT!

 

DEO is about 3 x E for debt, and about .2 x E in cash.  Hmmm....  Not great, but probably okay for consumer staples.

 

WTW is about 40 x E for debt and about 5 x E in cash.  Zoinks! I have doubts even Oprah can fix this.

 

Is this a reasonable way to look at debt?  I started doing this because it felt like % of capital was misleading when different companies / industries have such different needs for capital.  I do know I need to look at when debt is due when things are marginal. 

 

Do you have a favorite way of looking at debt?    Am I misleading myself?

 

Thanks!

 

-Jeff

 

 

 

[Guest notorious546]

Debt to Cash Flow, Debt to EBIT, Debt to Equity are all reasonable ways to evaluate a company's debt levels.

[Travis Wiedower]

As notorious alluded to, comparing debt to actual cash flow is good. Since you referred to Value Line, I assume your numbers are GAAP which may not be accurate. A lot of people like net debt/EBITDA which mostly makes sense--anything over 4-5 is high.

[Graham Osborn]

JNJ is about 1 x E for debt, and about 2.5 x E in cash.  Great!

 

AMGN is about 3.5 E for debt, and about 4 x E for cash.  Nice.

 

AGN is about 8 x E for debt and about .2 x E for cash.  RED ALERT!

 

DEO is about 3 x E for debt, and about .2 x E in cash.  Hmmm....  Not great, but probably okay for consumer staples.

 

WTW is about 40 x E for debt and about 5 x E in cash.  Zoinks! I have doubts even Oprah can fix this.

 

EV/ Rev and EV/ EBITDA are my favorites, but EBITDA can be inflated depending on how restructuring charges are categorized.  Other good ones are ROA/ ROIC.  Another one you won't find in most screeners is Rev/ Assets which I sometimes use to compare companies within an industry if I don't trust the accounting.

 

+1 on your AGN comment, but do realize the market expects the debt to be offset by ~40B in cash from Teva.  Teva still has to issue the bonds/ regulators need to give the green light/ etc etc so the probability-weighted present value is probably a good bit less than 40B.  The EV/ Rev figure is cap neutral through such transactions.

[CRHawk]

 

Thank you all!

 

Good stuff to think about and look at.