When we think about a company's use of debt, we first look at cash and debt together.
Of course, plenty of companies use debt to fund growth, without any negative consequences. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. When Is Debt Dangerous?ĭebt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. But the real question is whether this debt is making the company risky. We can see that Imdex Limited ( ASX:IMD) does use debt in its business. Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is.
