Debt can be a doubled-edged sword in business. No business can always expect to have the cash reserves ready to take advantage of opportunities that arise, and passing up certain chances for growth due to nothing other than limited funds can often prevent a company from reaching its full potential. Taking on substantial amounts of debt can be the wisest course of action if it improves the overall outlook for a company.
However, if the recent debacle spreading throughout Europe is any indication, simply taking on debt to cover shortfalls in cash reserves can have dire consequences. High levels of debt can catch up to a company just like they did Greece or Italy. What’s more, the flexibility to overcome economic downturns or unpredictable troubles can go out the window if a company’s cash flow is already committed to servicing its debt load.
So, it’s never easy to determine whether companies carrying debt are simply opportunistic enterprises taking advantage of growth opportunities or money pits that are headed for trouble. For an investor, the safest plan of attack might be to simply ignore any companies carrying high levels of debt. However, identifying those debt-laden companies that are on the road to paying off what they owe might also be a way to find good buys at a relatively low price.
So, here are six companies that are carrying high levels of debt but could still be solid investments. While they’re burdened by a high debt load, they have the sort of cash flow and margins that could mean they’re on the way to greener pastures. Each of these companies has a debt/equity ratio (total liabilities divided by total stockholder equity) of over 0.5. However, they also have operating margins over 25 percent, gross margins over 50 percent, and a P/FCF ratio (share price divided by free cash flow per share) of under 15.
Sotheby’s (BID)
Debt/Equity: 0.53 Operating Margin: 34.87 percent Gross Margin: 89.53 percent P/FCF: 8.64
The legendary auction house dates back to 1744 and is the fourth oldest auction house in the world.
Discovery Communications (DISCA)
Debt/Equity: 0.65 Operating Margin: 42.48 percent Gross Margin: 68.56 percent P/FCF: 11.05
Discovery Communications is a global company working in non-fiction media and entertainment. It’s potentially most visible through its cable arm in the United States, the Discovery Channel.
ITT Educational Services (ESI)
Debt/Equity: 0.89 Operating Margin: 33.81 percent Gross Margin: 63.13 percent P/FCF: 5.54
ITT Educational Services is a for-profit education company providing post-secondary degrees throughout the United States.
Gilead Sciences (GILD)
Debt/Equity: 1.13 Operating Margin: 45.20 percent Gross Margin: 74.67 percent P/FCF: 9.76
Gilead is a bio-pharmaceutical company developing and commercializing treatments for life threatening diseases.
TiVo (TIVO)
Debt/Equity: 1.13 Operating Margin: 45.20 percent Gross Margin: 74.67 percent P/FCF: 9.76
TiVo’s digital video recorders helped to introduce the technology to the country.
World Acceptance Corp (WRLD)
Debt/Equity: 0.75 Operating Margin: 28.98 percent Gross Margin: 77.25 percent P/FCF: 4.68
World Acceptance Corp works in the business of small consumer finance loans.
All data from finviz.com
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