Deep Debt Considerations

Many people fail to reasonably take an account of how much they spend and thus fall into deep debt. There are people, who don't realize how much in trouble they are after they have made large credit card bills and mortgage payments, have taken a car on leasing, and have to pay the tuition of the education of their children in private schools. And still some of them will ask for a loan from the bank. And guess what the bank's answer will be? An absolute NO.

If you are in the same position as the one described above, you should not be angry to the bank. They are doing it for your good, because continuing to spend above what you can actually afford, will lead you to financial collapse.

However, besides people, some companies are committing the same mistake. They fall in the illusion that the money they continue to borrow are for the good for the growth of the company.

Many companies in their attempt to gain extra resources ask for bank credits, try to get vendor credit, issue bonds and make whatever possible long-term borrowing arrangements.

Some companies forget that the borrowed money at one time or another should be returned to the lender. Borrowing money may be good for the purpose of growing the business or winning a greater market share, but companies should make considerations on whether the returns will be high enough to cover the debt.

Before borrowing the money companies should consider the possibility of experiencing the reverse conditions of the market, which doesn't free them from repaying the loan.

Therefore, as an educated investor you should pay close attention to the amount of debt the company has. If the company you hold stocks of grows too much debt, this may lead to cash becoming too tight. This may have a negative impact on your investment.

Before you make any judgment on the debt amount of the company, you should consider the industry within which it operates. Service companies don't require too much debt. However, companies that require the vast construction of production facilities tend to hold deep debt. Such companies, like the ones operating in the utilities and telecommunications industry, need many years to see the fruits of their investments.

When you make a debt evaluation, compare the target company with the rest of the industry members. If its debt greatly exceeds the one of its peers, you should interpret it as a sign to look deeper.

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