This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

IBM's Debt Mirage: Analyst's Toolkit

BOSTON ( TheStreet) -- A big debt load can send investors running for the hills. But the ability to carry debt is more important than its sheer size.

General Electric (GE - Get Report), IBM (IBM - Get Report) and Caterpillar (CAT - Get Report) have high debt-to-equity ratios but that doesn't necessarily mean they're riskier than Alcoa (AA - Get Report), Cisco (CSCO - Get Report) and Wal-Mart (WMT - Get Report), which have low debt-to-equity ratios.

Pairing the debt-to-equity ratio with a similar gauge of financial risk, the interest coverage ratio (sometimes referred to as times interest earned), provides a complete picture of a company's risk. That addition might portend an earnings pinch due to financing costs.

The interest coverage ratio is simple to calculate: earnings before interest and taxes (EBIT) divided by interest expenses. Those figures are listed on the income statement. The ratio shows how easily operating earnings cover interest expenses. The higher the number, the better.

If IBM, Cisco and Hewlett Packard (HPQ - Get Report) were compared based on the debt-to-equity ratio, IBM would look risky. With a debt-to-equity ratio of 1.38, IBM appears to be carrying far more debt financing relative to its size than HP and Cisco, which have ratios of only 0.41 and 0.26, respectively.

Once the interest coverage ratio is applied, the view changes drastically. IBM's interest coverage ratio is a whopping 53, while Cisco is comfortable at 20.6 and HP has a respectable 5.4. While the financial health of Cisco and HP isn't called into question by this addition, it does vindicate the seemingly highly leveraged IBM. As such, IBM is free of any concerns about a debt drag that may have been raised by the debt-to-equity ratio alone.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AA $10.24 -1.06%
CAT $74.24 -2.78%
CSCO $26.44 -1.56%
GE $30.07 -1.83%
HPQ $11.59 -1.02%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs