Helping You Build Wealth With Honest Research
Since 1996. Try Now

MEMBER'S LOGIN

MEMBER'S LOGINX

     
Invalid Username / Password
   
     
   
     
 
Invalid Captcha
   
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Outperformance of debt free firms
Tue, 18 Feb Pre-Open

The Indian economy is in a state of low growth. The situation is not likely to improve any time soon. Several corporate houses are struggling in the face of falling demand for their products. Others are facing issues with government clearances and regulations. However the most serious problem facing Indian companies today is not the external economic situation that they face. Rather, it is one which is self-inflicted.

According to the Economic Times, the biggest issue that is hitting India Inc hard is the overhang of debt. With the Reserve bank of India (RBI) raising interest rates to combat inflation, the situation seems dire for many companies which have too much debt on their balance sheet. As the article points out, the companies which have stayed away from debt over the last five years have done very well for themselves.

These firms have not had to worry about high interest rates as their debt levels were either very low or nil. This has greatly helped them post strong bottomline numbers over the years. Also, being debt free brings with it another advantage. These companies can choose to re-invest the surplus cash flow back into their business and gain a competitive advantage over their peers who might be struggling to make interest payments. Over time, all other things being equal, such firms can significantly outperform other companies in its industry.

The article mentions stocks from various sectors like FMCG, IT, MNC Pharma and Auto which have outperformed the market by a huge margin. In stark contrast, companies with high debt levels have given very poor returns over the last few years. So does this mean that one should invest only in debt free or low debt companies?

The answer is not so simple. While the debt/equity ratio is a great way to filter out bad companies, it cannot be the only criteria. A company with zero debt may, at times, be at a disadvantage in an economic upturn. This can happen if a competitor were to take advantage of low interest rates to build up its competitive position. Size is also a factor. A large company may be able to service a higher level of debt than a smaller company in the same industry. Therefore, having low debt stocks in one's portfolio is great; it should not be the only criteria for selecting good stocks.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

View all commentaries | Archives

Read the latest Market Commentary


Equitymaster requests your view! Post a comment on "Outperformance of debt free firms". Click here!

  
ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

PREMIUM PRODUCTS
QUICK LINKS
POPULAR TOPICS
TRENDING TOPICS
FREE NEWSLETTERS
EQUITYMASTER SUPPORTS
  • HelpYourNGO
  • You Tube
  • Linkedin
  • Twitter
  • Telegram
  • Google Play

Copyright © Equitymaster Agora Research Private Limited.

Whitelist | Refer | Terms | Privacy | Contact | About | Sitemap

Phone +91-9136015013

Equitymaster Agora Research Private Limited (Research Analyst)
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Email: info@equitymaster.com. Website: www.equitymaster.com.
CIN:U74999MH2007PTC175407

Name of the Compliance & Grievance Officer: Ms Sonal Ramachandran
Telephone: +91-22-61434003 | Email: compliance@equitymaster.com

LEGAL DISCLAIMER:
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.