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Companies without debt are considered to be inefficient. The whole idea of a company is that if I have $100 to invest, I can either lend it to someone else and

Companies without debt are considered to be inefficient. The whole idea of a company is that if I have $100 to invest, I can either lend it to someone else and get interest, or I can build something and get a profit for my effort. As a company, if you can't make more money from your $100 than you could get from lending it to someone, then you shouldn't be running a company -- you should be lending your money to someone else. If you can make more money running your business than lending money, then you can also make more money than it would cost to borrow money. If you are making 10% on your $100 and someone offers you another $100 for 5%, then it's a pretty good deal if you can expand your business. Just to make it clear, 10% on $100 is $10 and 5% on $100 is $5 dollars. So by borrowing, you expand your business and make $15 instead of $10 -- increasing your profits by 50%. Obviously, I chose easy numbers to make the math obvious, but generally it works. The thing you need to ask yourself before you borrow money is, "What are the chances that I can make that I can expand my business with that money" and "What are the risks". But generally speaking, healthy companies can increase profits if people keep offering them more money to work with. There are a few exceptions that have so much cash that they don't know what to do with it. Believe it or not, that is considered to be a big problem.

bduerst 8y ago
Yep, leveraging debt is considered a financial tool, not a malaise. Corporate accounting is very different than a personal bank account. Even companies with large cash reserves will take out loans when the interest rates are less than the internal rate of return of spending that loan. Most people take out loans for personal things, not increasing their own personal rate of return.
deleted 8y ago
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liftbigweights 8y ago
> The whole idea of a company is that if I have $100 to invest, I can either lend it to someone else and get interest, or I can build something and get a profit for my effort. No. The idea of the company is to pay out the $100 to shareholders. You take on debt if that makes more financial sense to the shareholders. A prime example is AAPL and their dividends. They could repatriate $1 billion from overseas accounts and pay 10% ( or $100 on taxes ) and then pay $900 million in dividends to the shareholders. Or they could keep their $1 billion overseas, borrow $1 billion at 1% interest rate and pay $1 billion to shareholders. Debt makes sense for corporations because you are able to shift profits to the shareholders and risk/liabilities to the company. Ultimately, that's why companies exist. To shield shareholders from liability and to serve as a vehicle to transfer profits/wealth to the shareholders.
tim333 8y ago
A lot of the "efficiency" thing is about tax efficiency as generally interest payments are tax deductible whereas dividend payments are not. So if as an investor you put in $1000, the company makes $100 before and tax and interest, and pays it out if you are a debt holder you get $100, and if a stock holder something like $70 = $100 less corporation tax.

bduerst 8y ago

Yep, leveraging debt is considered a financial tool, not a malaise. Corporate accounting is very different than a personal bank account. Even companies with large cash reserves will take out loans when the interest rates are less than the internal rate of return of spending that loan. Most people take out loans for personal things, not increasing their own personal rate of return.

deleted 8y ago

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liftbigweights 8y ago

> The whole idea of a company is that if I have $100 to invest, I can either lend it to someone else and get interest, or I can build something and get a profit for my effort. No. The idea of the company is to pay out the $100 to shareholders. You take on debt if that makes more financial sense to the shareholders. A prime example is AAPL and their dividends. They could repatriate $1 billion from overseas accounts and pay 10% ( or $100 on taxes ) and then pay $900 million in dividends to the shareholders. Or they could keep their $1 billion overseas, borrow $1 billion at 1% interest rate and pay $1 billion to shareholders. Debt makes sense for corporations because you are able to shift profits to the shareholders and risk/liabilities to the company. Ultimately, that's why companies exist. To shield shareholders from liability and to serve as a vehicle to transfer profits/wealth to the shareholders.

tim333 8y ago

A lot of the "efficiency" thing is about tax efficiency as generally interest payments are tax deductible whereas dividend payments are not. So if as an investor you put in $1000, the company makes $100 before and tax and interest, and pays it out if you are a debt holder you get $100, and if a stock holder something like $70 = $100 less corporation tax.