In the housing crisis, millions of people have seen firsthand just how damaging debt can be. But investors don't always realize that debt doesn't just have the capacity to screw up our personal lives -- it can also constrain businesses.
The downside of debt
Sure, debt isn't all bad. It lets people buy homes and cars and finance their educations, for instance. And it's a way for companies to get their hands on cash with which to build their business. But just as debt can force us not to take that big vacation because of mounting credit card debt, or leave us out on the curb if we lose a job and can't make our mortgage payments, it can hurt businesses, too. If a company faces steep interest payments, it has far less of its excess cash available for other purposes. If it enters a slump, with shrinking earnings, it's still on the hook for those interest payments, which can leave it on shaky ground and can leave shareholders heading for the exit.
Debt has challenged many companies. Sirius XM Radio
Meanwhile, although Altria
The big picture
Don't think of debt as an automatic deal-breaker. It can be used effectively, if it helps a company grow and the company is able to pay it down. Many casino companies, such as Las Vegas Sands
As you become a student of debt, you'll learn that it can exist in various forms. My colleague Matt Argersinger, for example, has pointed out that even though struggling Office Depot's
Finally, take note of the interest rates that companies are paying on their debt. You can often find these details in footnotes to financial statements. Genworth Financial
There's a lot of debt out there, so it bears watching. A recent USA Today article noted that even as the U.S. debt level stands at $9.7 trillion, representing 63% of our gross domestic product, 147 out of the 500 companies in the S&P 500 have debt levels equal to or exceeding 63% of their annual revenue.
Factor debt levels into consideration when you look for great investments. Don't let debt put you or a company you invest in out of business.
Looking for compelling investments? Check out the world's best dividend portfolio.