How much debt is acceptable?

[GautamBanerjee]

How much debt would you consider acceptable in today's rising interest rate scenario. Is it safe to buy stocks of companies that have more debt. I'm new to this stock investing thing. I was reading about 'leverage' and 'interest cover' and was wondering how much is too much? Do tell me.

 

[rebeck10]

2% according to money management rules

 

[aryan.]

There is no simple answer if debt should be high or not. It depends on the sector too, e.g auto and steel industry companies have high debt.

Ideally debt should be low with a current ratio atleast 2.

2% according to money management rules

He is talking about company debt not personal trading debt.

 

[rvm123]

normally a debt equity ratio of 1:2 is acceptable. That is for every rupee of equity, Rs.2 of debt is considered as reasonable. If debt is more, interest burden will be more. If interest coverage is more (i.e., if net profit is more even after paying interest it is OK). If equity is more, and there are no debt, it means, the company is not using cheaper capital available for interest. Here, for debts, interest is paid as onetime payment; however, equity capital is a permanent liability, and requires to be serviced permanently.

 

[Aziz value investor]

Hi rvm123,

It look you are not at all risk averse person when you say that ratio of 1:2 is ok.
After paying interest if you are making equal amount will that make you happy? if yes then you are overshadowing the risk involved with leveraging.

Debt interest is paid one time but don't forget that debt by itself has to be repaid!
Regards
Aziz
valueoperations.com