Thursday, June 22, 2017

Debt Ratios

In order to judge is a stock has good debt ratios you have to have a feel for what is common for the sector the stock is in. In the chart below I am look at five different debt ratios. These are categorized by the sectors my stocks are in. There are not so much typical ratios for stocks, but typical ratios for stocks of the different sectors.

If you notice for Banks and Insurance under Financials, the Long Term Debt/Market Cap ratios are quite high. For this ratio, you generally want it at or less than 1.00, but Financials are quite different from other sectors in this regard.

For Liquidity Ratio, generally you want it to be 1.50 and above. Most, but not all sectors achieve this. In some sectors, the companies depend on cash flow to cover current liabilities. See the low ratios for Real Estate and Infrastructure Utilities. Note that most analysts do not consider this ratio at all for Financials.

For Debt Ratios (Assets over Liabilities) you again want the ratios to be 1.50 and above. However, banks are different. For banks the standard used to 1.04 and above. Most banks have now moved higher than 1.04. Insurance companies are similar to banks for this ratio.

Generally for Leverage or Assets/Book Value you look for a ratio that is under 2.00. However, the median for different sectors can be higher. Banks and Insurance companies have very high Leverage Ratios. Utilities can also have relatively high Leverage Ratios. For example, the median Leverage Ratio for my Power Utilities is 3.03.

The Debt/Equity Ratio is similar to the Leverage Ratio, but is lower. Generally here you want a ratio less than 1.00. However, it is generally higher in some sectors like Utilities. The financial also have very high Leverage and Debt/Equity Ratios.

Below is my chart on the median ratios for the different sectors. The column titles are: LTD = Long Term Debt, Debt/Market Cap Ratio; Liq = Liquidity or Current Assets / Current Liabilities; A/DB= Asset/Liability Ratio; Lev = Leverage Asset/Book Value; Dt/Eq = Debt/Equity Ratio. This can help you decide if a stock is out of line with the ratios of its sector.

Sub-Index C LTD Liq A/DB Lev Dt/Eq
Cons Discretionary C 0.23 1.91 1.86 2.10 1.10
Cons Staple C 0.11 1.54 1.87 2.21 1.21
Health Care C 2.73 2.12 1.90 0.90
Real Estate E 0.65 0.85 2.03 1.98 0.98
Bank F 8.23 2.20 1.07 16.37 15.37
Financial Services F 0.44 1.52 1.66 2.51 1.51
Insurance F 6.51 1.65 1.08 12.99 11.99
Construction I 0.15 1.39 2.09 1.96 0.96
Industrial I 0.19 2.78 1.79 2.49 1.49
Manufacturing I 0.21 2.02 2.30 1.66 0.66
Services I 0.23 1.43 2.02 1.93 0.93
Materials M 0.22 1.80 1.81 2.41 1.34
Energy R 0.35 1.28 2.03 1.97 0.97
Tech T 0.00 2.24 2.58 1.53 0.53
Infrastructure U 0.29 0.87 1.69 2.54 1.14
Power U 1.08 1.24 1.42 3.03 2.13
Telecom Services U 0.37 0.52 1.63 2.62 1.62

*C =Index code or type of stock. C=Consumer, E-Real Estate, F=Financial, I=Industrial, M=Materials, R=Resources, T=Tech and U-Utilities.

On my other blog I wrote yesterday about Computer Modelling Group Ltd. (TSX-CMG, OTC-CMDXF)... learn more. Tomorrow, I will write about Parkland Fuel Corp. (TSX-PKI, OTC-PKIUF)... learn more on Friday, June 23, 2017 around 5 pm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my site for an index to these blog entries and for stocks followed. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter. I am on Instagram. Or you can just Google #walktoronto spbrunner8166 to see my pictures.

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