Understanding company debt

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Investors should consider the downsides, risks & debt of the listed companies they're considering. keithmclachlan unpacks some common debt ratios and highlights which JSE stocks have them in dangerous territory.

Most investors, and much of the commentary in markets, focus on the earnings of listed companies. There are thousands of earnings measures , and many ways to interpret them. There is also a huge focus on the valuation of these earnings. But good investing is also about being able to avoid large losses, and in this respect there is often not enough discussion around company debt.

What it means: This is a measure of how many years’ Ebitda it would take to pay off the capital owed by a company. Put differently, this is how many years’ profit shareholders may lose to pay off a company’s debt. Source: Refinitiv Debt-to-equity ratio=debt/shareholder equity How to calculate it: If you take the debt and divide it by equity, you get to see what percentage of assets are financed by debt in a company.

 

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