November 5, 2011
Just like our Jose Rizal, Benjamin Franklin was a renaissance man. He was a main figure in the American Revolution. He flew a kite and discovered there was electricity in the atmosphere. He made one of the first effective anti-counterfeiting measures by using a leaf imprint on paper currency which is almost impossible to copy accurately. He was also into finance giving us the most memorable quotes, “Time is money” and “A penny saved is a penny earned”. That’s right. His least memorable finance quote though is “He that goes a borrowing goes a sorrowing.” Maybe it’s because it sounds like a forced rhyme. Below is a forced rhyme explaining Ben’s quote.
The higher the debt, the higher the interest expense
The higher the interest expense, the lower the net income
The lower the net income, the lower the retained earnings in stockholders’ equity and the higher the company’s PER
The lower the stockholders’ equity, the lower the company’s capacity to pay cash dividends and the lower the book value
The lower the book value, the higher the company’s PBV
The higher the company’s PER and PBV, the lower the company’s value
The lower the company’s value, the lower is its upside and the higher is its risk
So avoid debt
Even before Benjamin Graham, Benjamin Franklin was already practicing value-investing. To value investors, debt is something that has to be avoided. To finance working cap, capex and expansion, it is better to use internally-generated funds than debt. It is no wonder debt rhymes with death because debt kills value. For a company or even a government to borrow money, there has to be a very, very good reason. However, a lot of companies and governments normally and easily use debt as a funding source. In these times, this has gone out of control as seen in the US and European debt crisis. How is China’s debt to GDP by the way or debt as a percentage of GDP? It seems like it’s the remaining superpower left somewhat standing. It’s 17.70%, in the lower tier globally (whoo, sigh of relief). What about us? It’s 47.30%. We’re somewhat in the middle (o… k). US is 93.20%, France is 81.70%, Germany is 83.20%, Italy is 119%, Greece is 142.80% and Japan is 220.30% (still in your seat?).
In our full coverage of 47 stocks, almost half of them have a debt to equity ratio (DE) of below 1x. Having a DE of higher than 1x means liabilities is higher than capital. To be conservative, we analyze companies’ leverage based on DE and not its variants like net debt to equity. Even suppliers credit or accounts payables is a form of borrowing or money owed to another party. The least-leveraged companies in our coverage are PX, BEL, GMA7, FLI, AMC, URC, VLL, MEG, SMDC, FPH, AGI, LCB, HP, ALI, AC, JFC, RLC and SMPH. There are also third-liner stocks with low leverage such as CHI, COAT, I, PHN, RFM, TA, EEI, ANI and FAF. See, it can be done. Debt can be minimized and even avoided by the biggest and even the smallest of companies.
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Nieves Sanchez, Inc.
PNB Securities, Inc.
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