Muhammad Shu'aib Kamaludin asked 6 years ago
Hi Peter,
I am analysing a company which is low PE, high ROE, also in a net cash position (cash is more than all debts added up), interest expense divided by EBIT is just above 10%, however debt to equity ratio is >1. Any advice what to check on the debt, to see if this debt is good or not? I’m trying to figure out why the debt was taken out – was it to finance growth etc. etc.
Of course this analysis is just the numbers part. The company is Go-Ahead Group plc, a public transport provider in UK (bus and train for many towns/cities and also inter-city travel). It’s recently been subject to many strikes by employees on only one of their train services in London and currently has very negative public perception, reflected in the share price. I still need to read up on the management, and how well the company is positioned to continue making money in the coming years.
Many thanks!
Muhammad Shu’aib
Peter Lim Staff answered 6 years ago
If the interest expenses is low as a percentage of EBIT, i’m not so worried about its Debt / Equity Ratio. This is true especially when the company’s ROE is very high. Instead, focus on sustainability of its Revenue and its profit (or better yet, increasing revenue and profit).
As for the debts usage, it is part of the capital (and so is shareholder’s equity as well as supplier’s credit). Thus, i don’t think its possible to break down the usage for the debt only.