Debt could be a reason behind a company’s shutdown; but if managed well, it could even turn out to be beneficial for a company. Watch our engaging and easy-to-understand video from the ‘#LearnWithUpstox series to learn more about debt and its various types.
Whew! Look at this, another company has just shut down because of debt.
Whether debt is a good thing or a bad thing is very subjective, and it varies as per the situation.
Let’s talk more about debt today.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
In this video, we’ll talk about debt and its implications, and whether or not it’s a good thing. Let’s get rolling.
Is debt a good thing?
Debt is a very controversial topic when it comes to investing money. Many people believe that debt, if managed properly, can be very beneficial for a firm. But many also believe that debt impacts earnings negatively. And in some cases, can destroy the company.
What are the types of debt?
This one thing is true, that collecting excessive debt can often shut companies down. But it is often important to understand which type of debt a company has – current or non-current debt.
In the case of current debt instruments, they are instruments that need to be repaid within a year. For example, bank overdrafts, short-term loans, overnight loans, etc. If there are too many of these, we can be in trouble. If the company doesn’t have enough cash in-hand, and if any of these lenders calls them up and says, “Come on, it’s time to give us our money back”, there is a real possibility that this short-term debt can become problematic.
However, non-current debt is a little different.
It’s debt that must be paid after more than a year. Sometimes, this period is as long as 20 years – long-term bonds and bank loans are examples of this kind of debt. Here, there is no risk of having to pay back the money overnight.
But does that mean that if you have a lot of this type of debt then there is no problem? Of course not. Anything in excess is poison and even in this case, a lot of debt would mean a lot of interest payments. If your earnings are less or are not growing at a fast-enough rate, then the profitability of the company can dip very rapidly.
Always remember, debt isn’t necessarily a bad thing. But it always helps the investor’s heart that there isn’t any or that there is very less of it.
That’s it for now. Thank you so much for watching our video on debt in our series, Learn with Upstox. I hope you learned something today.
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