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QuestionsCategory: Investor PsychologySenior Convertible Notes
April Lo asked 1 year ago

Hi Victor,
 
I have come across this term called senior convertible notes on the financial statements of Alteryx. If senior convertible notes is connected as debt, the debt to equity ratio of Alteryx will be somewhere around 1.8x, otherwise, the company doesn’t have any debt. Since it is a very high ratio, I’d want to dig deeper into what senior convertible notes is. I have checked the definition of it on Investopedia and know that it is a debt security that contains an option making the note convertible into a predefined amount of the issuer’s shares. It also states the risk of using such instrument can cause the bankruptcy of a company if they’re unable to pay up the debt. So my questions are:
 
1) Do you include senior convertible notes in debt to equity ratio?
2) Is senior convertible notes a red flag to watch out for and why?

Thank you very much.

3 Answers
Victor Chng answered 1 year ago

Hi April,
 
1.Yes, you should treat senior convertible notes as debt and include it into the debt to equity ratio.
 
2.Yes, if the company constantly raising senior convertible notes because it may signal that the business is not cash generative. If it is just one time, it still ok. 

April Lo answered 1 year ago

Thank you for your answers, Victor. After digging the news about its use of senior convertible notes issues last August, I find it very uncomfortable they were doing so to buy 50% of their existing senior convertible notes and not giving solid explanations on why they did so, I’ll steer clear on this company.
 
I also wonder, for Alpha Case Studies of IDEXX, I found out that the debt to equity ratio of IDEXX is rather high. Just wanna know your thoughts on how you access this ratio for IDEXX.
 
Thank you :)

Victor Chng answered 1 year ago

Hi April, 
 
For Idexx, they have been reducing their share count throughout the years so their equity have reduce. Hence, debt to equity is not a good ratio to measure their debt level. You should use debt to cash flow ratio instead. 

April Lo replied 1 year ago

Thanks Victor!

Victor Chng replied 1 year ago

Welcome :)