This is an article to be published in the Australian Financial Review next Monday on line, and in print this Wednesday. We have chosen to make it available to members beforehand ,with some slight alterations. The date of publishing means the stocks referred to are relevant to that time. As always, use Stockopedia to understand how the debt position of your businesses are structured.
Companies are often required to tap the global markets to source debt funding and Central Banks across the developed world have sought to reign in inflationary pressures with rate rises that have impacted debt markets. So now that rates have reverted to more normal levels post the pandemic all time lows, the net outcome of higher rates is that it will cost more for our companies to raise debt financing into the future. Subsequently this could potentially have a very big impact on margins for those who are heavily indebted and are unable to pass those costs onto customers.
So this reporting season, look for those companies with higher debt ratios to put a continued focus on reducing debt this period to help alleviate future pressure. This is something many had done at the time of their interim reports six months ago. Which leads to the question, “How do we measure a company’s debt exposure and whether it is ‘excessive?’”
The market traditionally looks to Debt-to-Equity as a measure of a company’s indebtedness, how much of a company's assets are funded by debt, and how much by equity. A company which is too heavily leveraged on debt to fund a businesses asset base is more susceptible to problems should rates rise. This often quoted ratio is available through most platforms with other valid variations including “Net Debt to Equity” (Stockopedia refers to it as Net Gearing) which considers debt on the books net of cash and “Net Debt to Tangible Equity” which uses the book value of equity excluding goodwill and other intangibles. The exclusion of intangibles can also be applied to the traditional D/E calculation.
However investors seeking to find more detail by considering other ratios such as:
Long term debt to Equity - Long-term debt is debt due for repayment in over 12 months and is not included in the current liabilities figure on the balance sheet. It includes debts that…
