Getting rid of debt
Here are some companies that have cut their debt significantly in at least four of the last five years
Dec 6, 2018
Debt is a curious financial instrument. If used well, it can give boost to a company's profitability. If misused (intentionally or unintentionally), it comes back to haunt the promoters and investors. History is full of examples when debt has gone out of control and companies have gone bust when they failed to meet their debt obligations.
Aggressive managements justify taking enormous debt for acquisitions and expansion. But the high rate of failure of acquisitions suggests that such they fail to create shareholder value in the long run. But the high debt taken drags down the acquiring company for many years to come. Overall, it appears that debt creates more problems than it solves.
Having realised this, many companies proactively bring down their debt levels. Lower debt means less interest outgo and hence better profitability.
The table mentions some companies that have cut their debt and increased their interest-coverage ratios in at least four of the last five years. It also means that the company's operations are becoming strong enough to fund its growth and expansion.
The Z-Score measures the probability of going bankrupt. It should be above three for a company to be called 'safe'. As one can see, the companies in the table have high Z-scores, which indicates that decreasing debt has also contributed towards their stability.