Why debts are a necessity for you and me

Can companies grow without debts? That’s an interesting question I believe. Actually, every company would have to take on debts. You may ask what about those companies where the funds came from the parents? Haha. Debts which you do NOT need to pay back is still a form of debt. The term gearing ratio is used for listed companies, especially the developers. The reason is because the public would like to know the amount of debt that the company is taking up relative to its assets. If the gearing ratio is Zero, it still does not mean that the investor would then buy. This may just meant that the company has nothing much to do and thus do not need to borrow any funds.

If the gearing is way too high however, many would exercise caution but some would still buy! The reason is because most of the time, before the company starts to earn a much larger profit than previous years, it’s gearing would go up first!  Buy land, buy materials, hire workers, buy lots of other stuffs and pay for lots of other stuffs BEFORE the final profit is finally realised when the key is handed over. This is one key reason why many do not prefer property stocks because if one would like to realise the potential of these undervalued property counters, it may take some time and thus harder for any speculators to suddenly earn lots of money. True?

In this case, what about the rising household debts. Surely this is bad for the country because we are already at 87.9% of GDP where household debt is concerned. When we look at the demographic of Malaysia today as well as the fact that formation of family is still continuing and baby shops are increasing, I think the answer is quite clear. This percentage may continue to increase UNLESS the number of affordable homes suddenly flood the market and cause prices to really stay stagnant for a few years. The reality is, despite all the hype at both the federal and state government level, the numbers of these affordable homes can hardly be said to be flooding the market.

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I think this situation of high household debt would still continue. Yes, more often than not, the level of debts we have versus the assets we have is always higher on the debt side. Over the years, we can then slowly turn these productive debts into assets.  The more important factor we must keep in mind is on whether the debts we incur is for future growth or for the enjoyment today. Of course, never overstretch but even more important is not to stay stagnant and do nothing. Last but not least, no one should be over-confident no matter how much experience or wealth gained thus far. Happy investing.

written on 5 Apr 2015

Next suggested article: Switching for better investment, always.

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