The need for leverage

FEATURE

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With companies' debt-to-equity ratios continuing to fall in 2014, Annabelle Williams asks if investors are underestimating the value of leverage.

Debt aversion has been a part of investor mindset since the dotcom bubble of the late 1990s. Investors bought in to internet-based companies making annual losses on the expectation they would one day make huge profits. “In the 1990s no-one wanted to know about cashflow. What people wanted was rapid growth,” explained Gary Reynolds, chief investment officer at Courtiers. “There was a metric called ‘cash burn’ – how much cash a company had and how long until it would run out. People later realised that was a disastrous way to look at businesses.” When the bubble burst in the early 20...

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