Debt-to-Equity Ratio

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A general question regarding Debt to Equity Ratio:
For great companies, I do check if this ratio is good ( < 0.5). However, for a small company (usually venture) this is not usually the case I feel. Is it okay to ignore this ratio? an example: GDNP. I recently bought it as I liked the theme – plastics and packaging. However, I noticed this company had 3.68 as Debt-to-Equity Ratio. I ignored it considering the long prospects.
I wanted to gauge your opinion. Thanks in advance!

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Asked on February 24, 2021 10:21 am
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Thanks Dan!

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Posted by Justin Samuel
Answered on February 24, 2021 5:09 pm
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So debt to equity is a little tricky in growth companies.

The thing you really need to consider, is if that debt is being used efficiently to increase income.

Say if a particular amount of debt costs a company $1 in financing costs (interest) every quarter. But, the acquisition or development they made with the money that resulted in the debt is expected (or even better, is currently) generating $1.20 in net income, then you don't mind the leverage.

A high debt to equity ratio is a very tell tale sign that a company is financing its growth. In a developed company, this would set off alarm bells. But with GDNP, this is actually to be expected.

Companies like GDNP are going to be highly leveraged. They don't currently have the cash flow to rely on internal funding for growth, and have to seek outside sources via debt or share offerings to eventually build the business up to where it is cash flow positive.

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Posted by Dan Kent
Answered on February 24, 2021 1:30 pm