Two Minutes Reading for the Smart Investing Strategy
When you invest in a company, you’re betting on its ability to survive tough times and thrive in good ones. But if that company is loaded with debt, even small bumps in the road can turn into big problems.
📉 Why Debt Is Dangerous
Debt isn’t always bad—it can help companies grow. But too much debt works like a double-edged sword:
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In good times, profits can look bigger because borrowed money boosts growth.
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In bad times, fixed interest payments still need to be made—whether profits are there or not.
A small drop in sales can quickly lead to cash shortages, layoffs, or even bankruptcy.
💡 Leverage = Amplifier
Think of debt as a volume knob for risk:
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If the business does well, debt can amplify returns for shareholders.
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If the business struggles, debt can amplify losses—and speed up the fall.
Just like turning the music too loud can blow your speakers, too much leverage can blow up a company.
📊 How to Spot High Leverage
When researching a stock, check:
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Debt-to-Equity ratio (over 2 is often a red flag for most industries)
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Interest Coverage Ratio (earnings divided by interest expense—less than 3 is risky)
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Cash Flow Trends (declining cash flow + high debt = trouble ahead)
✅ Smart Investor Move
Favor companies with strong balance sheets, plenty of cash, and manageable debt. These businesses can weather storms and seize opportunities when competitors are struggling.
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