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Debt and Value


NormR
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Many value investors like to take a close look at a firm's balance sheet strength before investing in its stock. 

 

What debt factors are the most important / most useful to you when looking at bargain stocks?  (i.e. debt/equity, current ratio, year-over-year change in long-term debt, interest coverage, debt rating, market price of bonds, etc...)

 

On a 10 point scale, how important are these factors in your overall investment thesis with 10 being very important and 1 being of little concern?

 

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If the company is overlevered then debt pay down/management is critical to the thesis.  Net debt to ebitda is a common metric - take a look at CYH over the last year.  Ignoring the secular industry trends, the big driver of the stock has been managing debt hurdles and selling assets to meet debt obligations.  Obviously throw some good quarterly results in there also (until 2Q17).

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Many companies think they can borrow money for an opportunity or do a stock-cash swap. Lots of tricky games you can play because the market value of your stock can be used as currency. Some party, buyer or seller groups can really get burned.  I would just look at Berkshire's model. Have enough cash lying around that you can make a deal if it comes around. If it goes wrong, it's easy to see, likewise if it goes right.

 

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Norm,

Almost all of them matter and the importance varies on a case by case basis. I also look at the debt schedule. Year on year delta in ltd doesn't matter as much as what that debt was used for. However, debt to equity and interest coverage invariably come before the rest when screening manually, but I look at all at least once before taking a position.

 

 

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