Every now and then I like to take a look at the highest yielding stocks in the market. Not to buy them of course, because the dividend yield on its own is a crude tool at the best of times. Instead, I’m interested in finding out which companies have crashed and burned, and what lessons I can take (for free) from their various situations.
One major recurring theme is the excessive use of debt, so this month I want to ram home the importance of avoiding highly indebted companies, using a series of embarrassing examples (embarrassing because management should know better). As a bonus, one of these companies may actually be a bargain.
In each of these five examples I’m going to look at the ratio of debt and pension obligations to the company’s five-year average earnings. In my experience the debt ratio should be below four to be considered remotely prudent, whilst the pension ratio should be less than ten. Anything more than that is asking for trouble….