INVESTINGTIP

A company’s balance sheet is a snapshot of its assets and liabilities. It contains revealing ratios, among the most important of which is debt to equity. If a company has a lot of debt in relation to equity, such as $2 of debt for every $1 of equity, it means the equity, or common stock, has the use of bonds or bank loans to turn in what amounts to supercharged performance. It’s much like an investor acquiring stock on margin. This leverage works well when business is booming. Some companies, such as banks, actively manage their leverage under the watchful eyes of regulators. But other businesses can let their debt spiral out of control, making many investors head for the door. To avoid being caught at the exit, watch the debtto-equity ratio. It varies by industry, so compare to peers, but one to one is usually safe, two to one is high and anything over that indicates a lot of debt for every $1 of stock.