Successful investors agree that debt is an important criterion when deciding on which shares to buy. Companies that have good cash flows and reserves and low debt have resources to invest in research and development and the ability to expand to new markets. They can also survive tough times, as they will have the required cash reserves to weather the business cycles. Or as Wa
Debt levels are analysed as the ratio of debt to equity, known as the debt-to-equity ratio.
Low Debt and Brand Value
Our investment philosophy focuses on businesses that have low debt equity ratios and own successful international brands. The strategy shows that a company that has loved brands that are sought after all over the world are likely to have substantial cash flows enabling business expansion, innovation with new products and technologies and resilience in the ups and downs of the business cycle.
Companies that carry significant debt burdens are subject to interest payments that could limit their ability to invest in brand building, innovation and expansion. This inability to fund growth could limit a company’s ability to sustain and expand a competitive advantage and threaten the 20-year outlook for the business, making it a less attractive investment target. A perfect example of this type of occurrence is Kodak – they did not anticipate the growth of digital photography and were not able to compete without large loans. As their debt ratio increased and their brand lost value they eventually were unable to sustain their business model.
We monitor the debt of all the companies in our investment universe very closely to ensure the long-term sustainability of our clients’ portfolios.
If there are warning signs that a company has lost its ability to keep attracting customers to its brand, then we will switch our investments to other brands. Warren Buffett provides the pearls of wisdom that support this thinking:
At AXIAM, our focus is to assist our clients to grow wealth through long-term investments in companies with strong brands, growing dividends and little debt. If you are interested in learning to grow your wealth, sign up to our newsletter or contact our fund management team to invest.