Why you should avoid investing in companies with positive net debt.

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

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Net debt is a measure of a company's financial leverage, calculated as total debt minus cash and cash equivalents.

It is an important metric to consider when investing, as it can indicate a company's risk of bankruptcy.

Companies with positive net debt have more debt than cash, which means they are more reliant on borrowing to finance their operations.

This can make them more vulnerable to economic downturns and rising interest rates.

Here are some reasons why you should aim to avoid investing in companies with positive net debt:

• Higher risk of bankruptcy: Companies with positive net debt are more likely to go bankrupt than companies with negative net debt. This is because they have more difficulty meeting their debt obligations during difficult times.

• Less flexibility: Companies with positive net debt have less flexibility to invest in growth opportunities or to weather economic downturns. This is because they have to use their cash flow to service their debt.

Of course, not all companies with positive net debt are bad investments.

Some companies may use debt to finance growth initiatives that will ultimately lead to higher profits.

However, it is important to carefully evaluate a company's financial situation and prospects before investing in it, especially if it has positive net debt.

Example:

As of 9 November 2023,

Fortinet (FTNT) and Palo Alto Networks (PANW) are two leading cybersecurity companies.

Fortinet has negative net debt, while Palo Alto Networks has positive net debt.

Fortinet's negative net debt gives it a financial advantage over Palo Alto Networks.

Fortinet has more flexibility to invest in growth initiatives and to weather economic downturns.

It is also less likely to go bankrupt than Palo Alto Networks.

How to find companies with negative net debt:

There are a few ways to find companies with negative net debt:

• Use AI-powered chatbots: Chatbots like BingChat can help you find companies with negative net debt by using prompts such as "Find companies with negative net debt." However, it is important to note that chatbots are not always accurate.

• Search on Yahoo Finance: You can also search for companies with negative net debt on Yahoo Finance. Go to the company's balance sheet and look for the "Net Debt" line. If the number is negative, then the company has negative net debt.

• Check the company's latest quarterly earnings figures: The company's latest quarterly earnings figures will also show its net debt. You can find this information on the company's website or on financial websites such as Yahoo Finance.

Conclusion:

Companies with positive net debt are more likely to go bankrupt than companies with negative net debt. They also typically have lower profitability and less flexibility. Investors should aim to avoid investing in companies with positive net debt, especially if they have low growth rates.

I hope this helps!