- K C said...
Is debt bad?
Corporations borrow money to do business and investors earn amplified returns from the financial leverage. There is an option value of a leveraged business. Hence borrowings is not a bad and in fact it is good thing provided that the borrowings is not excessive and it earns a return higher than the after tax cost of borrowings and that EBIT is able to pay the interest costs comfortably. In QL Resources case, with a relative high leverage of 2.35, QL obtains an excellent ROE of 22% (>15%). ROIC is about 13.5% (>12%), showing a good utilization of capital. Times interest earned is 10 and with good cash flows from operations. Hence I think the management of QL has done a good job in growing the company with proper utilization and management of debt.
Let me just share it here so that everyone can have a more 'balanced view'.
Most companies with huge debts never have it so good nowadays. In a financial crisis, one would have imagined that huge cash reserve would have an advantage but it so happened with US companies that are 'too big to fail' and government interference has tip the scale illogically. Malaysian businesses with debt never had so good, the cost of borrowing it subsidised by cash rich companies. It is no surprise that better than expected ROE is associated with companies with debt, the same with REITs. Should these debt loaded companies given a breather here to improve their debt situation or borrow more to take advantage of the low cost of borrowing? I only think they should do the former, doing it any other way would be gambling with share holders stake.
ReplyDeleteHi Moolah,
ReplyDeleteQL has been consistently delivered good results in term of revenue growth and profitability for the past few years. I guess the investors are very impressive of the company’s performance. Everything is seemed under control except Debt / Equity ratio.
[Sep 2010 - 68% ] [Jun 2010 - 57% ] [Mar 2010 - 61% ] [Mar 2009 - 74% ] [Mar 2008 – 75% ] [Mar 2007 - 79% ]
There is a sudden increase in debt ratio by 11% in last quarter. How?
Over expansion sometimes can bite back. Even though figures now are ok, it might not guarantee forever. Flower does not bloom forever. Risk in management succession and other qualitative factors.
ReplyDeleteMoolah,
ReplyDeleteIf you have time, can you give your comments on Tradewinds (TWS)? This company went into massive debt for expanding its business.
Thanks.
tklaw: made one small posting b4 on it.
ReplyDeletehttp://whereiszemoola.blogspot.com/2007/06/twscorp.html
Although QL debt has increased, If you look the % over profit or equity, it actually decreased. Anyway, QL is giving out warrant to rectify the debt issue.
ReplyDeleteFor info, if you have invested RM10k in QL ten years ago, you will be having more tham RM100k now. Investor should be happy. But this is history.
Polite Market:
ReplyDeleteFor info, if you have invested RM10k in QL ten years ago, you will be having more tham RM100k now. Investor should be happy.
Aha.... :=)
I understand that this is the stock market and ulitmately, everything is gauged against the performance of the stock.
And sadly for me... this is where the world is....