- Now let's take a look at some different
debt ratios and how they can be applied.
We're going to illustrate using the tech sector,
four companies with which we are all familiar,
Microsoft, Google, Apple and Amazon, the big four.
Here is some information from each company's balance sheet.
Now there's a lot of information here
because we're going to make a lot of points.
First of all, notice that for Google, Microsoft and Apple,
from 40 to 60% of their assets
consist of investment securities.
For Apple for example, they have over
200 billion dollars in investment securities.
That's money that they've invested in other companies.
Now the reason I point this out is that you can also see
that Apple has 93 billion dollars in long term debt.
They've gone to a bank and borrowed
almost 100 billion dollars.
Why did they do that with all these investment securities?
Why not just cash those securities
in instead of borrowing money?
Well, that's a discussion for another day
but let me just hit the high points.
Apple can borrow money for next to nothing
and their investment portfolio has been doing quite well
of late as the market has stayed pretty high.
Now, here we have a table of the various types of debt
ratios, and remember the possible iterations are endless,
these are just the most common measures of leverage.
One thing to notice right off, Google has a low debt ratio
and a low debt to equity ratio
and a low asset to equity ratio.
Since these ratios all are measuring the same thing,
just a little differently, it makes sense
that the direction of the ratios should be the same.
Google's are all low relative to the other companies.
The point here is this.
Google has low leverage however you measure it,
but you have to be careful not to compare
Google's low debt to equity ratio
to Apple's long term debt to assets ratio.
The numbers are about the same,
but they are using completely different scales.
To use another example, suppose someone tells you
that the temperature is 22 degree.
Is that hot or cold?
Well it depends on what measure you're using.
Are you using the Fahrenheit scale?
Then 22 degrees means it's cold,
it's below freezing, you better have a coat on.
But are you using the Celsius scale?
22 degrees, that's comfortable room temperature.
Are you using the Kelvin scale?
Well then it's a little colder
than it is on the planet Pluto.
The same number, 22, means a different thing
depending on what scale you're using.
Same thing with these leverage ratios.
To drive this point home, notice that the debt ratio
is about the same for Microsoft, Google and Apple.
Notice also that the debt to equity ratio
is about the same for these three companies.
And then notice that the asset to equity ratio
is about the same for all these companies.
These companies are all leveraged about the same,
so the same ratios give similar results.
You just have to be careful and not compare
different ratios across companies.
When someone is talking about leverage,
you need to ask the question how are you measuring that?
What ratio are you using?
Interestingly, Google is a very profitable company
but they pay for their lack of leverage
when you look at return on equity.
Apple's return on equity is 56%.
Google's is 17% and much of that difference
can be attributed to Google's not using other
people's money to buy assets to generate
sales in order to generate income.
So the takeaway, leverage ratios come
in a variety of shapes and sizes.
If you're comparing leverage across companies,
make sure you're using the same ratios.