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Written and copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved.
This page reviews a study concerning the stock performance of companies with and without long-term debt.
Long-Term Debt Summary
Value Line defines long-term debt as "the portion of borrowings (including bank notes, debentures, and capitalized leases) that will be due not in the current 12 months, but in
future operating years."
I thought that debt was bad, that high levels risk ruining the company and no debt was preferred. Too high debt is detrimental, of course, but so is too little debt, according to
this study. I found that companies that had long-term debt had stocks that performed better than those companies with no debt.
Long-Term Debt Methodology
I used the Value Line investment survey and typed in their long-term debt numbers to build a database of 178 stocks with data ranging from 12/30/1991 to 7/11/2008.
After completing the database, I logged the close-to-close price change from 1 to 5 years out, looking
forward from the base year. The base year ranged from 1992 to 2006. Not all stocks covered the entire range.
Years with no numbers were excluded. The price change measured from the close on the last trading day of each year.
Years 2008 and later are not included since the year had not completed as of the time of this study.
Long-Term Debt Results
The following table shows the stock performance companies with and without debt over time.
| 1 yr | 2 yrs | 3 yrs | 4 years | 5 years |
| Debt | 12.2% | 12.9% | 13.5% | 14.9% | 16.2% |
| Samples | 1123 | 980 | 851 | 719 | 591 |
| No debt | 10.6% | 11.4% | 12.3% | 11.1% | 10.3% |
| Samples | 935 | 901 | 857 | 822 | 788 |
For example, if companies had debt during year 0, they gained an average of 12.2% the following year. Companies with no debt showed stock prices rising 10.6%.
In each of the five years, companies with debt showed better stock performance over the coming one to five years than did those companies with no long-term debt.
The reason for this, I believe, is leverage. Those companies with a modest (whatever that means) amount of debt put it to work to make more money. Their
stock performance reflected that success by rising.
-- Thomas Bulkowski
Copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved. Q: What should you give a man who has everything? Q: A woman to show him how to work it.
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