company has really outdone the federal government in the last
decade -- it has multiplied its debt nine times in the last ten
years. "What a disaster!" the debt-phobes would say.
is a sad-looking history of debt, piled on top of debt, piled
on top of more debt. Obviously, this company is headed for the
scrap heap, right? Ten billion dollars of debt makes this one
of the biggest debtor-companies in existence. How can they possibly
continue to hang on? This ugly track record must be a huge embarrassment
to the stockholders --how could they possibly have been so stupid
to invest in such a spendthrift, out-of-control drag on the economy
such as this corporation? Bankruptcy must be just around the corner,
wouldn't you agree?
you answer, I'd better tell you which company we're talking about
here. It's none other than...
Wal*Mart. One of the best-managed, fastest-growing, highly-respected
companies in the whole world, as well as on the
New York Stock Exchange. So well-run that it was recently awarded
a spot in the Dow Jones 30 Industrials. Millions of people love
to shop at Wal*Mart, and millions love to invest in Wal*Mart.
Something doesn't quite add up, does it? How can such a debt-hungry
corporation be so well respected? In all those gloom-and-doom
books, the debt-phobes tell us that piling up debt is a sure recipe
for disaster. What's going on here?
what's going on: Debt is a single number. Single numbers don't
tell us much when we're trying to evaluate financial health.
and income, that's what's missing. The assets that are backing
up the debt, and the income the assets helped to generate. The
assets that were purchased with the money that was borrowed. The
assets that are helping the borrower become wealthier (i.e., helping
future income grow larger than it would have been otherwise).
management purchased assets with the money they borrowed -- they
didn't burn the money; they invested it in their business. They
purchased productive assets like stores, trucks, warehouses, and
computers. Assets that generate more than enough additional income
to cover the interest on the debt that was used to fund those
assets. (The United States of America is no different, either.
I explain this elsewhere; see What's an Investment?.)
let's fill in the missing piece. Here's the rest of Wal*Mart's
debt story sure looks different when it's placed next to assets
(i.e., the stuff the debt helped to purchase), doesn't it? No
wonder so many investors love Wal*Mart (irrespective of its debt-pileup).
Wal*Mart knows how to use borrowed money wisely. They know how
to use it to get wealthier.
not listen to single, scary-sounding debt numbers. Don't fall
victim to Single-number-itis. We must demand more information.
A single number doesn't tell us enough.