Debt and Leverage: The Basics
Posted on Wednesday, June 25, 2014
Each month in SmallCap Informer the editors recommend two growth-oriented small-cap stocks, along with insights on key factors affecting smaller companies. In the May issue of SCI, the editor provides a quick primer and debt and leverage and their relevance in the small-cap context.
Companies typically raise cash to fund their growth and operations by either selling shares of stock to investors or borrowing money. When small companies need capital to fuel growth, they may borrow cash to fill that need, a practice known as leverage. Successful companies manage debt carefully to balance the risks of using borrowed fund against potential returns.
Several measures help investors analyze a company’s debt and understand the risks associated with that leverage. They include the interest coverage ratio, or the ability of a company to pay the interest due to lenders; the debt-to-equity ratio, used to analyze a company’s debt load; the debt-to-capital ratio, which looks at the company’s total debt compared to its total capital; and credit ratings (provided by agencies).
In the May issue of SCI, the editors provide a detailed discussion of each of the various measurements of debt and leverage, as well as a chart showing the three key ratios discussed above for 11 SCI stock picks. Want to learn more? Click here to subscribe to SmallCap Informer to receive investing insights each month, along with two fresh stock picks.