Dont look at your HMY investments gearing then lol
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Let me guess - you never owned a bank ;) ;
I think you would need to put some more rules around this rule (dependent on industry, cashflow and similar) to make it useful, but for most industries 40% gearing is nothing.
And hey - OCA doesn't even have to pay interests for some of their debts.
The new stage of village living at The Bellevue in Christchurch opened today.
Yes and no. I agree it's highly risky to invest in high leverage companies. After my bad experience I prefer to go with strong balance sheets. However, it depends on the management and type of business. Those who make use of leverage wisely could generate above average income in the long run.
[QUOTE=Rawz;1025107]One of my rules of investing is to not have money in a company w]
ith over 40% gearing.[/QUOTE
The thing with the 40% rule, aside from the extra risk, is it limits the returns you can get.
For example look at RBD…they have used crap loads of debt to buy earnings per share in the USA and Aus via taking over restaurants. they can’t do this again for a very long time. They need to pay down debt and grow out of it. This often puts dividends at risk or kills them.
Or NZL.. since listing they highlight the CAGR of their AFFO which is impressive but they won’t be able to maintain it because the land purchase needs to slow as they have already loaded the balance sheet up.
In the tough times the SP gets punished and if earnings slip you are up for a cap raise at the wrong time devastating shareholder value aka RYM.
Exclude financials and possibly less risk for utilities but still they can’t grow as fast if they have already used all the leverage available.
Some exceptions to the rule but it’s a red flag for me always and something I look at
Generically that's probably true, but as per a couple of questions earlier, how does that relate to OCA's debt? All the RV's are within a few %debt of each other (aside from the no-interest debt to residents). They are all property development companies, they all leverage debt to fund that. OCA's interest rates on bank debt is very low compared to new debt at current market rates and will be for some time to come.
I don't think your blanket rule of thumb, >40% debt = bad, is particularly relevant to RV's or OCA. We might find out for example that the assets sales are/have happened and returns applied to reducing debt. Or plowed into development (growth), as the interest rates are still very low for quite some time. We won't know until reporting, which is close by.
IMO there's more important things to be concerned about than a debt ceiling, for example as others have said, what we're really looking for is an uptick in sales, particularly new sales. These generate revenue which can also be applied to reducing debt, if that is the priority of the company.
I have zero concern for OCA's bank debt at the moment.