OK besides looking for cash rich companies make sure you'll only invest your money in companies with
a low level of debt you're unlikely to find any well-established business that doesn't carry some level
of financial liability.
In fact a little debt can be a good thing when it helps to provide the funding for business growth and
expansion.
Since this type of activity tends to raise the overall value of a company.
But that doesn't make it acceptable to invest in a business that's carrying a large debt load since
it's very easy for a company to get into trouble once it overextends itself financially and is no longer
able to service or repay its loans.
That is to say having too much debt can lead to many financial troubles.
So as a value investor you should be careful when picking a company to invest in when looking at a company's
financial statement you'll find that there are two types of debt short term debts and long term debts
for evaluating a company's short term debts.
You can use liquidity ratios and for evaluating the long term debts you can use solvency ratios to find
out if a company's debt level is high or low.
You can compare its debt ratios with that of its rivals and the industry average.
And finally you should also evaluate the company's ability to repay its short term and long term debts
if it can generate enough cash flow to pay its bills on time.
There may not be any problem however if the company fails to pay its bills on time.
It's going to have a problematic relationship with its suppliers and lenders and that will affect the
business in the long run.
Remember that when you buy shares in any company you are effectively lending that company your own hard
earned money.
So make sure that youll only seek out businesses with low debt loads and a reliable track record for
repaying their debts.
So that's Principle Number Three.
See you in the next video.