Exercise caution when it comes to debt for investors.

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Financial Times 1w ago

Exercise caution when it comes to debt for investors. - Financial Times

Quick Summary:

Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it is a matter of whether the amount of debt is appropriate relative to the size of the overall enterprise and the potential for fluctuations in the enterprise’s profitability and asset value.

But when events turn negative, this process goes into reverse. Leverage is penalised, not rewarded.Thus, its use declines. And importantly, lenders provide less and try to demand repayment of outstanding leverage if they can, leading to negative consequences for borrowers.

Obviously the greatest leverage-related losses occur when the potential for downward fluctuations has been underestimated for a meaningful period of time and thus the use of leverage has become excessive.