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If a company can provide return on capital greater than 9%, then spending their money to get a 9% return is not actually a good investment. It’s more complicat
by zaroth 7y ago
If a company can provide return on capital greater than 9%, then spending their money to get a 9% return is not actually a good investment.
It’s more complicated than this because it’s expected rate of return with some variance, and deploying additional side-lined cash doesn’t always achieve the same return as the previous dollars, etc. etc.
But it comes down to this; if the best thing a company has to do with its dollars is pay down debt, they are telling you that they couldn’t think of anything more reliably profitable or useful to do with the dollars than that.
- reitzensteinm 7y agoParent was talking about parking spare cash, so buying up bonds and selling them as an alternative to something like a money market account. Although for Tesla, it would be an alternative to paying down their ABL. A company that is cash flow positive and is looking for investment opportunities simply does not have bonds that yield 9%. Not in this millennium. In any case, I don't think you really hit on the reason not to do this. If you park your working capital in your own bonds, they're going to take a haircut when times get even worse, which is exactly when you'd be liquidating more of them. This could trivially turn in to an outright death spiral unless further funds can be raised from elsewhere. Probably not the bond market!