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By Anton Crabbe 24th May 2025

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I am always surprised when I see market reactions to high debt levels and credit downgrades, as we have seen recently with US long-term bond yields touching 5%, their credit rating being downgraded. Also, credit rating agencies have indicated that Australia’s and some state government credit ratings (mainly Victoria) could be downgraded too, unless borrowing and expenses are reigned in.

Being a fundamental investor and some would say old fashioned or out dated. It has always been a red flag when a business had a debt to equity ratio over 100% and anything over 50% is questionable. As this inhibits a business’s ability to generate returns, produce free cash flow, pay dividends, and most importantly to invest capital back into the business to keep growing and developing. The cheapest source of capital is retained earnings/savings. The amount of research that highlights high debt levels are detrimental to shareholder returns is numerous, and how any investor would want to invest in a company that has high debt is beyond me.

I am always some what aggrieved when all of a sudden brokers and market experts it times like these start to focus on underlying strong fundamentals and start spouting the importance of a quality balance sheet. Rather than this eternal summer mentality of constantly chasing cycles, sectors, and commodity prices.

When the market is running hot, an old fundamental investment style is pushed to the side and told that it’s a new world and that style of investing is outdated and doesn’t work anymore old timer. Yet when the market turns south, the first think you here is look at the quality of a stocks balance sheet and to much debt is bad. It always has been and always will be Sonny Jim!

For me fundamentals is where you start, not where you end up. They can be incorporated into any investment style are well understood, and easy to find and read. So why not use them. The GFC erupted on the back of bad debits and financial institutions globally holding to much debit. High debt levels have never been good for investors, businesses or governments, ever!

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