Is high leverage good or bad?

Hello! Maybe just to be clear, leverage is the borrowing of capital to make an investment, with the expectation that the return on the investment would be higher than interest from the debt taken on. Here are perhaps a few points that i would take note of.

First, i think leverage would depend on the amount of interest that is tied to your debt. the lower the interest rates, the better.

Second, it is also important to note that interest expense is tax deductible as well, this would generated an interest-tax shield that can increase cashflow.

Third, leverage also increases the volatility of the investment.

Also, what kind of debt that you have taken on would be quite important too. such as when the debt matures, the size of debt, protective convenants that might be broken etc.

You will probably also have to look at the other circumstances surrounding the company as the others have mentioned too.

Hi anon, i think this depends on the type of company and the kind of cash flow they are generating.

If the company is generating alot of cash flow and has alot of current assets, meaning high net income, cash and inventory this means that the company is highly likely to meet it's debt obligations. But how much is high is all relative according to the industry, meaning DBS is compared to banking industry, Hai Di Lao is compared to restaurant industry (and their debt is quite high).

Also, it depends on their growth stage. Just as i said HDL has high leverage (or debt), it is due to the fact that HDL is having huge ambitions to expand overseas, thus need to raise alot of additional capital through borrowing money from banks to fund this expansion. If a company is already in its stable state and still carry high leverage relative to its industry, you will need to keep an eye on it as there may be underlying reasons of inability to find internal funding to maintain it's operations.