Re: Biggest things you look for in a stock?
 

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What is wrong with a stock having debt?

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Nothing, as long as it's managable. And you don't want, IMO, stock in a company that is too leveraged.

Re: Biggest things you look for in a stock?
 

MIFan:

When looking at small cap stocks a few comments:

1. You need to look at stocks and how they trade relative to their peers.

2. PE ratio is not as important as implied valuation (market cap + debt - cash) to cash flow (EBITDA or EBITDA less maintenance capex)

3. You need to look at ownership - is management a big owner in the stock? Avoid small caps where managment or the Board has small ownership positions unless the stock is extremely undervalued.

4. If a small-cap is paying dividends something is wrong with the business fundamentals - why don't they reinvest money in the Company?

5. Another metric that is rarely used is cash on cash return (like a bond) If you were to buy this Company right now for its current implied valuation what would your return be if you just held the company for its cash flow?

Re: Biggest things you look for in a stock?
 

I just prefer stocks that don't owe any debt. It shows that they will never have to worry about it and are profitable in my eyes.

Re: Biggest things you look for in a stock?
 

I agree. The only time i dont' like a stock with debt is when the debt is more than its total cash.

Re: Biggest things you look for in a stock?
 

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The only time i dont' like a stock with debt is when the debt is more than its total cash.

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That's not automatically terrible. You have to look at the big picture. Although, more cash than debt is usually a good sign.

Re: Biggest things you look for in a stock?
 

I know that its not automatically terrible. But if some companies future doesn't look to be very profitable then I can't see it being a great thing.

Re: Biggest things you look for in a stock?
 

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The only time i dont' like a stock with debt is when the debt is more than its total cash.

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That's not automatically terrible. You have to look at the big picture. Although, more cash than debt is usually a good sign. I know that its not automatically terrible.

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But if some companies future doesn't look to be very profitable then I can't see it being a great thing.

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I'll jump in here and give my view... I'm hoping that JB will give his view later.

Comparing cash to the amount of debt a company has decided to take on does not really say anything about profitability. Also, theoretically, a company will do the best if it takes on as much debt as possible as long as it can safely handle it and a favorable return can be achieved. When debt is assumed, the goal is to generate a return that surpasses the rate of borrowing. And, over time this difference in rates compounds.

Also, you will see that companies that have been active in acquisitions often have a lot of debt. A couple of companies that have a debt/cash ratio greater than 1 are: Harrah's (HET) and Capital One (COF). Yes, carrying a lot of debt can be scary, but if well managed, can produce superior returns.

Just my two cents. Others may totally disagree with my view on debt. Also, I believe that most people tend to use the Current Ratio or Quick Ratio to analyze liquidity. I personally haven't seen that much use of the Cash Ratio.

-RMJ

Re: Biggest things you look for in a stock?
 

I'm surprised no one has mentioned dividend growth. You mentioned you like companies that pay dividends. Look for a couple large caps that have increased their dividends consistently for at least 10 years.

Read everything you can about investing and finance (books, magazines, internet), but do it with a critical eye. Best of luck.

Re: Biggest things you look for in a stock?
 

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Comparing cash to the amount of debt a company has decided to take on does not really say anything about profitability. Also, theoretically, a company will do the best if it takes on as much debt as possible as long as it can safely handle it and a favorable return can be achieved.

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You pretty well summed up my view on this. Good management knows how to handle debt. If the debt is taken on with specific purposes, and there is a high likelyhood that those purposes will generate returns above and beyond the cost of the money borrowed, then pile it on. This, of course, is not as simple as I make it sound. I personally wouldn't fell comfortable borrowing money just to re-invest it, but there are some who can. My only concern is if I fell like the money borrowed is primarily used to give the appearance of having more money than you really do, or to be able to give investors a higher return than they really should be getting.

Re: Biggest things you look for in a stock?
 

What he is saying is that when a company pays a dividend, they are effectively saying that their shareholders could get a better return on their money than if they reinvested it in their business.