Investor Education Story

Financial Indicator

Macroaxis News
  
By Nathan Young

May 12, 2017

Total debt is a measurement that is important in fundamental analysis. As the title states, total debt would be all debts, such as bonds, loans, and anything the company owes money on. If a company has debt, you want to see that the debt is being used wisely and that the company is not highly leveraged, meaning if they slow down in sales, it could become an issue with repayments.

Total Debt

If you are a value investor, you want to see a company have very minimal debt or no debt at all. In combination with that, you want the company to have lots of cash on hand so they can continue operating through the slow times, providing you with value in your investments if the company can pull through and eventually grow.




You can break debt out into a few parts to understand it better. With bonds, you want to see how much they’ve financed, the rates, and when they are due to pay back on those bonds. It could be a very small amount or many, either way, you want to see how that fits into the debt picture. Secondly, you could look at notes with lenders to see when those expire or how much the monthly payments are. This would include lines of credit, as they are similar but have their slight differences. Lastly, any short term debt should be noted because that should be going away within a year. What you do not want to see if a chain of long term debt being used to pay short term debt, which could be a vicious cycle that is indicating a cash flow issue.

Debt does not play into technical analysis much, but it could still be a factor non the less. Be sure to fully understand the intention of each debt because if it is being used to expand or grow the business, look at it as an investment because that will likely return more to you. Besides that, use common sense and if the debt pattern seems fishy, it probably is. Debt can be a powerful leveraging tool in business, but if used incorrectly, could bring a business down. There are many ratios to use as well if you are looking to compare across an industry so be sure to pay close attention to those. If you still have questions, reach out to an investing community and ask for peer input, as that can help to guide your thought process.

About Contributor

Nathan Young
   Nathan Young is a Senior Member of Macroaxs Editorial Board - US Equity Analysis. With years of experience in the financial sector, Nathan brings a diverse base of knowledge. Specifically, he has in-depth understanding of application of technical and fundamental analysis across different equity instruments. Utilizing SEC filings and technical indicators, Nathan provides a reputable analysis of companies trading in the United States. View Profile
This story should be regarded as informational only and should not be considered as solicitation to sell or buy any financial products. Macroaxis does not express any opinion as to the present or future value of any investments referred to in this post. This post may not be reproduced without the consent of Macroaxis LLC. Macroaxis LLC and Nathan Young do not own shares of FILTER. Please refer to our Terms of Use for any information regarding our disclosure principles.

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