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QuestionsCategory: Financials QuadrantIs Negative equity always good?
Zhigui Goh asked 1 year ago

I recalled in one of the videos, it was mentioned that negative equity due to stock buyback is a good thing. However, if the company swap equity with debt, isn’t it more risky? When business turn sour, company can stop paying dividend to shareholders but if they cannot pay interest on debt, they may go bankrupt. I suppose we should look out for the business nature and performance and whether their cash flow is healthy to pay the debt interest. Also need to look out for debt refinancing during rising interest rate environment and also the loan duration. Longer term the better?

1 Answers
Victor Chng answered 1 year ago

Hi Zhigui,
For company to do that, their cash flow have to be strong and consistent. If the company have very irregular cash flow then having debt is really bad. I will usually look at the business whether it is recurring and does it have a consistent strong cash flow. In general, I want to debt to cash flow ratio to be 5x or less. 

Zhigui Goh replied 1 year ago

Victor, thanks for explaining. Understand now.