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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19670  
Subject: debt, liabilities & rates Date: 9/7/2013 8:38 AM
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I guess this is the best board to post these thoughts, but lately I've been thinking about rising interest rate yields (i.e. $TNX--10 yr. Treasury) and the impact the added debt service would have on the the US and world economies.

For the purpose of this post, I'll limit to the discussion of US-based large corporations (not that the revolving debt of the US consumer is unimportant, just that it would clutter-up what is likely to be a long post anyway.

I have a spreadsheet which, after I type in a symbol, populates the various worksheets with 4 years of annual statements (income, balance sheet, & statement of cash flows; as well as the most recent 5 quarters of same). In this spreadsheet I created a page one worksheet which contains the various metrics which can be used to evaluate the financial data. This sheet has 70 lines of cell names and next to them the corresponding cell data value. The data ranges from the symbol, name of company, price, number of shares outstanding, and average 90 day volume; to items such as debt-to-equity, price-to-book, net net book value, quick ratio, interest rate coverage, price to tangible book and so on. Another column lists the revenues for each of the last three years, recent EPS, management effectiveness ratios like: ROE, ROA, RORE (Return on Retained Earnings), etc. At the bottom I have 3 rows dedicated to the change in diluted shares for each of the last three years and next to them the change in shareholder equity for the last two years (haven't added that farthest away third year yet).

Anyway, if anyone adds up the above they will find it but a sampling of the 70 fields, not a complete listing.

The other day the notion hit me that perhaps debt-to-equity might not give me a complete picture of the darkside so I added two fields: total debt-to equity (this captures long & short term debt) and; total liabilities to equity, which captures total debt but also other liabilities (short and long term) such as underfunded pension liabilities, retiree medical liabilities, and other types of long term outlay commitments that aren't structured as loans from a lending institution.

After having added these two metrics, I did a favor for a friend who was looking at dividend paying ETFs and had provided me with two lists: those that paid monthly, and those that paid quarterly. Mixed in with the quarterly ones (mostly) were some international enterprises (ones with home offices outside the US). Unfortunately my spreadsheet does not do well with international symbols, so I omitted them.

I printed out the top 10 holdings from each of these ETFs to seeing if there were any worth holding. I think I came up with less than 3 companies (not three ETFs) which I might personally hold.

Folks, the total liability to equity numbers out there are pretty staggering (at least for this old redneck who likes to see the first symbol in the number be a decimal point instead of a whole number).

The whole concept of comparing total liabilities (short and long term) with equity may be abhorrent to some who believe that current liabilities should be excluded because they are already supposed to be accounted for in the company's current budget. But when the credit market froze in 2008, it didn't really seem to matter if the current portion of long term debt was budgeted, if it needed short term financing to accomplish, there was none available.

I see too little discussion about total long term liabilities in analysis (not necessarily here, as some of you folks go pretty deep). With the yield on the 10 year Treasury having risen from about 1.5% to about 3.0% in the last month and a half, perhaps liabilities and their attendant debt-service requirements could use another look.

Poz
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