Prior to the pandemic most companies had a poor Current Ratio [cash savings to cover short term debts], but great Interest Coverage [cash flow to pay current debts].
We know now they used the cash flow to buy back stock rather than pay down debts. This is obviously the companies fault but the govt didn’t help by keeping interest rates so low for so long.
Low rates created moral hazard by incentivizing CEOs and Boards to reward shareholders and take bonuses on the assumption money will stay cheap forever. Few companies have the financial fortitude like Buffet to hold cash like Fort Knox in the face of better returns.
Regardless of the bailout, you can expect a Dodd-Frank type bill on buybacks once the dust settles from this chaos.
Note… before buying your next stock, look at these two debt numbers on their financials. Companies like The Street simplify them for each company. You want to see a value over 1 (one) minimum for both.
Robin W, guest blog
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