Fundamental Analysis Debt Indicators
By conducting fundamental analysis an investor can determine how strong a stock is. It involves looking at fundamental studies to determine if a company is actually worth investing in. Something that can make or break a business is how much debt they have.
After all if the company has too much debt and not enough cash it could mean that they are just hanging in there and will likely go under the next time they experience any kind of drawback.
1. Levered Free Cash Flow
The levered free cash flow can be used to determine how much income a company has after all their debt is paid. The more cash flow a company has the stronger it is suppose to be. Companies can also use that cash flow to pay some dividends to their investors which is another plus.
2. Solvency Ratio
The Solvency Ratio looks at how capable a company is when it comes to paying off its long term debt. The higher the ratio the better able the company is to pay down its debt. Generally a solvency ratio above 20% is considered good. On the other hand if it is under 20% it is considered to be bad.
3. Debt To Capital Ratio
The last ratio is called the debt to capital ratio. This ratio helps investors determine how much debt a company has compared to its capital. For example if a company has $2 million dollars of debt and 10 million dollars in assets there debt to capital ratio would be 20%.
Obviously the less debt a company has the better off they are and the more likely it is that they will survive in the near future. However these numbers can give an investor the wrong idea. Some industry groups may simply have more debt then other groups, and therefore the stocks in that group may be treated harshly by these studies.
For this reason it is important to compare these ratios with others in the same industry group in order to get a better understanding of what they mean.
