Some of you will still be wondering what the managers will have seen to invest in a company like the GFI construction company, which trades at a high multiple, Good Lender decreasing and with a significant debt problem.
Can be found in the debt
I also keep asking myself, but perhaps one of the answers to the question can be found in the debt that the construction company accumulates in its Balance Sheet. Can a huge amount of debt on a company’s balance sheet be a good reason to invest in it? Yes I know it sounds a bit strange and maybe it can be counter intuitive, but debt can help multiply the value of an action.
Personal commitment is that markets
Imagine you are an investor, and your personal commitment is that markets and equity in particular will continue to receive significant cash flows. As a consequence of this inflow of money, the value of the companies will become more expensive, that is, the multiples to which they are listed will be raised.
If you believe that this scenario will occur, in which company will you invest? In a solid, no debt, how Infotex? o In one that accumulates a huge amount of debt like GFI?
The answer you have in the first box that we attached. In it you can see how repeating in 2014 Good Lender and the level of debt of 2013, but increasing the multiple of Good Lender by 50%, the investor who invests in Infotex, will see how its stock is revalued by 47%. On the other hand, with the same conditions, the investor who bets on GFI will see that the price of the GFI share is revalued by 193%. Awesome, isn’t it?
The two repeat Good Lender, the two repeat the same level of debt and in both we increase the value of the VE / Good Lender multiple by 50% and however in Infotex the stock will only be revalued by 475 to reflect these changes in these three variables and instead in GFI it will increase by 193%.
Caused by the high percentage
The phenomenon is caused by the high percentage that represents in GFI the value of its net debt over the value of equity, to constant net debt, an increase in the valuation multiple is multiplied over the value of equity or the share. Curiously, Infotex happens the other way around. As Infotex has no debt but cash, an increase in the valuation multiple has a much smaller impact on the value of the share.
If you believe that the market will continue to become more expensive and you consider that GFI will not go to the rocks, your bet on the Good Stock Exchange is undoubtedly companies with a high degree of indebtedness.
Obviously this bet also has its dark reverse. See what your loan yields if the market decides that the shares are priced expensive and the VE / Good Lender multiple to which they are listed is reduced by 50%.
A constant Good Lender and net debt, if you bet on Infotex you will see how the share price is reduced by 47%. However, if you bought by GFI, you will see how the price of your equity or share is even negative, that is to say GFI will be worth absolutely nothing since the debt eats the full value of the shareholder.
We hope that with this post we have helped a little more to understand the risks, advantages or disadvantages of investing in a company with a Leveraged Balance or of investing in a company with a healthy Balance.
Good Finance commitment to GFI is a bet, above all, that the Good market is going to become more expensive and obviously that GFI will not go to the rocks and will be able to continue refinancing its Balance.