Companies report the generation and use of cash from three basic activities: cash from operations, selling assets and investments, and the financing sources of issuing new shares and taking on debt. Most companies use a combination of the three, sometimes relying more heavily on one type over another as they move from growth and expansion to a more mature company. This column focuses on the use of borrowed funds. Knowing the debt level of a company can help you more fully understand how the company structures its finances and whether it can continue to operate.
When used properly, debt can allow a company to earn a higher level of profits for a given level of owner equity. However, interest on debt must be paid whether or not a company is profitable, so too much debt may force a company into bankruptcy if cash flow dries up. In addition, the market’s appetite for debt can change over time, making it more difficult and expensive to borrow.
...To continue reading this article you must be a Computerized Investing Subscriber.
Already a CI subscriber? Login to read the rest of this article.
A subscription to Computerized Investing includes a monthly email and access to the CI Website, all of which aim to benefit your investing skills with respect to computers and the Internet.