The Company's Debt Equity Ratio should not be more then 2:1

 

A company that takes on debt to start a new project is considered better then a company that dilutes equity . This is because debt once taken can be repaid back whereas equity once issued remains that way unless the company starts buying back shares. The cost of equity is also higher then the cost of debt.

 

The Roe and RoCE of a company that is aggressively growing on debt capital should be more then the cost of debt (interest). This means that the company that grows its ROCE at a rate faster then the cost of Capital would do just fine . After all Return on Capital employed is the amount of money that we can make for a rupee of investment and cost of capital is the compensation that we pay for that rupee of investment.

 

The shareholder's confidence is further reinforced when the promoters have given a personal guarantee or provided their personal property as collateral security against the debt of the company.

 

Companies that increase the debt on the Balance Sheet get a lower PE multiple whereas companies that repay back old debt enjoy a better PE multiple on the bourses.

 

It is a bad sign to see a Company take debt when the Industry is in an up cycle (boom)