Debt Equity Ratio

Yes ideally I prefer the debt to equity ratio of companies to be under 1 and Ashok Leyland was never above 1 for sure when I invested and it was well under 1. You can see the complete reasons of my selection of Ashok Leyland here https://shabbir.in/portfolio-report-december-2016/

Debt equity ratio of under 1 is what I prefer but it doesn't mean I don't have exceptions. I did an exception in Jubilant lifesciece for sure but I am closely tracking its debt and let me share the complte details.

They had a debt equity ratio of close to 2 (1.95 to be precise) but yet the company was always profitable which means they had no issues serving that debt. This isn't enugh but if you look at the performance of the company, they had managed to reduce the debt from 1.95 to 1.55 in one year and this is when I entered into the stock with an assumption that their debt is going at a very brisk pace with good interest coverage ratio and company can become debt free in 3 to 4 years time.

The second reason for the high debt exception was because they impoved their profit margin big time and this is very good for any business. Higher margin wasn't because of higher sales but keeping the sales flat and so it meant that they are working on better use of capacity, better using the supply chain and things like those. So once the company is profitable and is working to improve on things, few years and their sales will improve. Look at march 2015 and march 2016 and you will see profit margins double and yet sales are flat. https://www.screener.in/company/JUBILANT/consolidated/

Other details of considering the stock is here - https://shabbir.in/portfolio-updates-sep-2016/

So when you know what you are doing and keeping a closer look at the balance sheet, you should be fine with exceptions but generally I avoid companies that are in high capex business, have high debt and aren't able to perform at the OPM levels.

Hope it helps.

 

Yes I have seen them and there you should be looking into the ROCE / ROE