Should You Avoid These 7 Debt-Laden Companies?

You often hear that America is too indebted. Our people, our businesses, and even our government have potentially borrowed beyond their capacity to repay. Debt in itself isn't a bad thing, if you can pay it back. But there's a fine line to be drawn between U.S. companies growing for the future and those living outside of their means.

Some sectors come with a predisposition to debt. Railroads, utilities, shipping, and oil exploration, to name a few, all represent sectors that have little choice but to dip into debt to purchase the infrastructure needed to grow their businesses. But some companies leave you scratching your head, wondering if that mountain of debt on their balance sheet is sustainable or eventually a deal breaker.

Below I've highlighted seven companies that exhibit significantly higher than normal debt-to-equity ratios either in relation to their peers or to the market in general. Some of these companies do indeed have bright futures, while others may be on the downswing of their existence as a publically traded company. While I can't tell you whether you should buy or sell these companies, I can hopefully spark some interest in these companies for future research.

Company

Debt/Equity

Sirius XM (Nasdaq: SIRI  )

1,036%

ATP Oil & Gas (Nasdaq: ATPG  )

699%

DineEquity (NYSE: DIN  )

1,516%

Avis Budget Group

1,738%

Ford Motor

4,123%

Newcastle Investment

5,135%

Dynegy (NYSE: DYN  )

179%

Source: Capital IQ, a division of Standard & Poor's. As of most recent quarterly report.

The one thing that comes to mind when looking at those staggering figures is "Wow, that's a lot of debt!" But in some cases, the debt load is expected.

Take ATP Oil & Gas, which remains primarily in the exploratory phase of its existence. The company has suffered big losses lately, but could be sitting on huge oil reserves in the Gulf of Mexico or off the coast of Israel. Deepwater research and exploration costs are extensive, but in this case they could well be worth it.

In other cases, sometimes debt is expected, but simply higher than expected in relation to its peers. DineEquity, the parent of Applebee's and IHOP, has suffered through many years of stagnant sales and declining margins. During the recession, the company was forced to lean on its credit line more than it wanted to, leaving the company deeply in debt. However, the company was able to refinance $1.8 billion in debt last year and extend its maturity out to 2017 and 2018. That should give the company ample time to turn itself around; but then again, it's been trying to turn itself around for years.

Finally, there are the debt mongrels: companies very likely to be sucked under by their debt loads. Take Dynegy, for example. Earlier in the year, Dynegy's management warned investors that there's a possibility the company won't be able to meet its debt obligations in the second half of this year. This statement came shortly after Carl Icahn, one of Dynegy's most prominent shareholders, offered to purchase the company for $5.50 per share. Whether Icahn offered to buy a dead duck is up for debate, but this has all the making of a debt load which could cripple the company. Similarly, I've highlighted Sirius before, questioning how the company will pay off its big debt load given its minimal profitability so far.

To sum up: Debt isn't a good thing, but it's also not necessarily a dooming factor. Consider the source of the debt, the sector, and the stock's relation to its peers and you'll have a better understanding of whether your company can meet its obligations when the time to repay rolls around.

Do you have any debt mongrels in your portfolio, or perhaps some wrongfully bashed debt-laden companies? Share your ideas with the community in the comments section below and consider tracking these stocks and your own personalized portfolio of companies with the free and easy to use My Watchlist.

Add Sirius XM, ATP Oil & Gas, DineEquity, Avis Budget Group, Ford Motor, Newcastle Investment, and Dynegy to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's free of charge, but full of interest.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2011, at 4:05 PM, meadorc wrote:

    It's definitely a dooming factor for SIRI. If you are playing around in SIRI for the short term then I can't really blame you, because it's a easy volatile stock, but when looking long term at SIRI.. I just can't see it happening. It's just too far in debt and it doesn't have a strong enough/constant enough strand of income.

  • Report this Comment On June 23, 2011, at 5:25 PM, doubting wrote:

    Sean,

    Here you are again with meaningless siri jabs. Are you not aware that even toward the end of 2011 siri will have enough cash on hand to pay off its 2013 debt in full if they want to. Why are you so disrespectful to your readers and readily available information regarding siri debt situation? You are at least two years late with your debt insinuations. No one is going to run anymore. We are not scared anymore. Debt is no longer an issue for siri. Good luck with your megastretching efforts.

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