Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 7

Long-Term Debt

Those who know me understand that I dislike debt. I am talking about personal debt, such as car loans and home mortgages. I use credit cards like everyone else, but pay off the balance each month. By making sensible choices over the years and spending wisely, I have been able to save money. When the lean times came, I dipped into my savings. During plentiful times, I saved and invested.

However, this chapter is about long-term corporate debt, not personal debt. When a company borrows money that is not due within 12 months, it is long-term debt. Let us take a closer look to see what the numbers tell us. I found the results surprising and confusing.

• Long-term debt is borrowed money not due within 12 months.

THE NUMBERS

During my first professional job as a hardware design engineer at Raytheon, every few weeks I visited the small library they had at the plant. I read Forbes and Fortune magazines and became familiar with fundamental analysis.

I remember thinking that finding a company without debt was like discovering a chocolate candy bar my three brothers had missed. It never dawned on me that a company having a modest amount of debt could use the money to create new products and build wealth. Modest debt was good, not bad, but do the numbers support this theory? Answering that question is where this story becomes weird.

IS DEBT GOOD?

I used my Value Line database and compared the year-ahead performance for companies having no long-term debt versus those ...