Philippine Stock Market Research

Leveraged

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.

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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

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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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Announcements

We would like to warmly welcome

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Nieves Sanchez, Inc.

and

PNB Securities, Inc.

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as subscribers to our MyRA research service.  They are now equipped with value-investing tools in the Philippine Stock Market as well as Corpecon Research’s signature fund management tools such as the Global Tracker, PSEi Bands and Margin of Safety Tracker.  Corpecon Research provides weekly Philippine Stock Market research to its MyRA subscribers.  We can still accommodate a couple more subscribers to MyRA.  Seek Value and Minimize Risk with Us.  Thank you.

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Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.