Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Limited Brands: What's Up With Your Debt?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Taking on too much debt may sound like a bad thing, but it's not always. Sometimes, debt-laden companies can provide solid returns. Let's see how.

Generally, the cost of raising debt is cheaper than the cost of raising equity. Raising debt against equity has two observable consequences -- first, the equity that shareholders value doesn't get diluted, and second, it results in a higher interest expense. As interest is charged before tax, a higher interest rate provides a tax shield, thus resulting in higher profits. Higher profits coupled with a lower share count translates into higher earnings per share.

However, when assuming debt, a company should see whether the returns from investing the money are higher than the cost of the debt itself. If not, the company is headed for some serious trouble.

It's prudent for investors to see whether a company is strongly positioned to handle the debt it has taken on -- i.e. comfortably meet its short-term liabilities and interest payments. Let's look at two simple metrics to help us understand debt positions.

  • The debt-to-equity ratio tells us what fraction of the debt as opposed to equity a company uses to help fund its assets.
  • The interest coverage ratio is a way of measuring how easily a company can pay off the interest expenses on its outstanding debt.
  • The current ratio tells us what proportion of a company's short-term assets are available to finance its short-term liabilities.

Let's look at the debt situation at Limited Brands (NYSE: LTD  ) and compare it with that of its peers.


Debt-to-Equity Ratio

Interest-Coverage Ratio

Current Ratio

Limited Brands 577.1% 5.9 2.0 
Ross Stores (Nasdaq: ROST  ) 10.5% 90.3 1.6
TJX (NYSE: TJX  ) 25.4% 47.8 1.6
Hanesbrands (NYSE: HBI  ) 378.8% 2.7 2.6
Gap (NYSE: GPS  ) 52.7% 70.2 2.2
Saks (NYSE: SKS  ) 43.4% 2.5 times 2.2 times

Source: S&P Capital IQ.

Limited has a remarkably high debt-to-equity ratio of 577.1%. Over the past 12 months, its debt has risen to $3.6 billion from $2.6 billion. At the same time, equity has fallen to $625 million from $2.07 billion a year ago. In 2010, Limited paid out more than $1.5 billion to its investors in the form of dividends and share repurchases, resulting in lower outstanding equity.

Limited, which operates such brands as Victoria's Secret and Bath & Body Works, saw a staggering 30% jump in profits this quarter over last. Though the company has used up a sizeable amount of cash to pay out dividends and fund buybacks, a free cash flow of $997 million suggests that it still has a large amount of money left in its coffers. Limited's interest-coverage ratio and current ratio indicate that it should have no real problems paying off its short-term interest requirements and liabilities.

Limited has been looking to expand internationally and plans to operate close to 1,000 stores internationally by the end of 2011. If Limited can deliver on its growth and continue to capitalize on its strong performance, it should have no real problem paying off its debts.

To get a running update on all the top news and analysis on Limited Brands, add it to My Watchlist.

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Gap and Limited Brands. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Read/Post Comments (0) | Recommend This Article (7)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1574918, ~/Articles/ArticleHandler.aspx, 10/26/2016 12:28:31 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 hours ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 4:05 PM
GPS $26.61 Up +0.06 +0.23%
Gap CAPS Rating: **
HBI $23.86 Down -0.72 -2.93%
Hanesbrands CAPS Rating: ***
LB $72.72 Down -0.47 -0.64%
L Brands CAPS Rating: ****
ROST $63.13 Down -0.26 -0.41%
Ross Stores CAPS Rating: ****
SKS.DL2 $0.00 Down +0.00 +0.00%
Saks, Inc. CAPS Rating: *
TJX $73.62 Down -0.56 -0.75%
The TJX Companies CAPS Rating: ****