February 2015 – No Debtors’ Prison For These Companies…

No Debtors’ Prison For These Companies…

Our students frequently struggle with the question of how much debt they should carry. Many come to the same conclusion as some leading companies such as Facebook and Visa: to have almost no debt.

Debt has its advantages. It can be used to pay dividends, buy-back shares, or grow the company without turning to shareholders – especially when borrowing rates are low and when there are tax advantages.

But some of the downsides include: interest must be paid regardless of whether the company has made a profit; the debt will eventually have to be repaid; and interest rates can rise for future borrowing.

So, should a company carry debt or not?  It depends…