Stock Picks | Debt | Doctor Dave

11th Nov '23 by doctor dave

4 comments 320 reads

It's clearly not a great time to invest in heavily indebted companies (e.g., to my surprise Relx (LON:REL) but what is the best measure of the overall debt burden of a company? There are so many to choose from!!!

Thanks

doctor dave

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Doctor Dave

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A grizzled veteran of the NHS

4 comments

XTR

11th Nov '23

Morning Dave,
I look for a ratio of Net Borrowing/Pre-Tax Profit to be less than three, which I got from Robbie Burns' book 'The Naked Trader' several years ago. Year over year increases in Cash at Bank and Free Cash Flow are also desirable indicators of a company's ability to service its debts.

Rusty2

11th Nov '23

I used that as well but the issue now, with the change in accounting rules, is leases are added on to the debt. Many people don't agree with the rules, but Stockopedia does not split out leases. I think Sharepad does but I don't use Sharepad.

I do hold Relx (LON:REL) their debt is a bit high but compared to most FTSE 100 stocks, relatively low.

BnB

11th Nov '23

I do hold Relx (LON:REL)

And what a beast it has been of late, showing that well-covered (with lovely recurring revenues) debt does not trouble the market - at least while revenues keep coming in.

As to the metric. I like the interest cover ratio. Although my basic rule is only low/no debt allowed except in exceptional circumstances, eg Relx

doctor dave

11th Nov '23

It was while assessing Relx (LON:REL) as a possible investment (even at this stage of its run) that I wondered about the best measure of indebtedness. You've both done well with that one!!!

Any advances on XTR's helpful suggestion of Net Borrowing / Pretax Profit??

Thanks

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Doctor Dave

4 comments

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