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There is an old saying among turnaround investors: “earnings and assets come and go, but debt is forever.”
Equity investors sit at the very bottom of a company’s capital structure. Everyone else, including all debt holders, must be fully paid before any value can go to the stockholders. When a company has a high level of debt, its earnings and assets need to cover a lot of obligations. Should those earnings and assets weaken, it can leave a pittance for shareholders and result in a poorly performing stock, or worse.
You can often get a sense of the magnitude of this risk by looking at the price of a company’s bonds. If the bonds are trading well below their face value, it can indicate that stockholders could be in trouble.