an interesting observation..., page-10

ponzi,

craft is right...net debt-to-equity is an unsatisfactory measure of indebtedness, prinicpally because while net debt is a highly accurate measure (try offering to pay back "approximately" a loan from the bank!) while "equity" is an approximation affected by all sorts of accounting assumptions.

Not only will you miss out on opportunities like SLM because their indebteness on Net Debt-to Equity seesm high, but - more critically - you might end up buying companies that seem to be adequately "geared" when in fact the equity is overstated. Any potential asset writedowns might find your company suddenly over-geared.

A far better approach would be to use "live" measures like EBITDA-to-Net Interest and Net Itnerest Bearing Debt-to-EBITDA.

My debt filter is for EBITDA-to-Net Interest to be greater than 5 to 6 times (depending on how capital intensive the business is...if OCF is greater than 4 times maintenance capex, then I might accept between 4 and 5 times, or depending on the growth capital and working capital funding needs of the business).

As a cross-check, generally, I won't invest if NIBD is more than double EBITDA.

Cam