How Debt Can Sink Your Investment
Another name to avoid is yet another good business gone bad via debt. I'm talking about Central European Distribution(CEDC) , a leading spirits company in Poland and Russia. In fact, CEDC has a No. 1 or No. 2 market share in most of its categories. The company also has $1.3 billion in short-term and long-term debt against $800 million in tangible assets. From a high over $30 back in 2007, shares trade for less than $3.
When you bet on a company that has excessive debt, you are praying for a miracle. Yes, miracles sometimes happen. At the peak of the financial crisis in 2008, shares of retailer Bon-Ton Stores(BONT) plunged from over $20 the prior year to nearly $1. Within a manner of months, the Federal Reserve began supplying credit to the economy, Bon-Ton was able to refinance is debt, and shares surged to over $15. Volatility like this attracts some to leverage. Bon-Ton's shares have since fallen back to $7, but the company remains highly levered.
In certain businesses, what appears to be an abnormal amount of debt may make sense. Overall, however, you can have a winning investment portfolio over the long run by simply eliminating the big wipeouts and staying away from excessively indebted businesses.