Conventional finance teaches that leverage is good when the overall return on capital employed is more than the cost of debt plus when you are making profits, interest cost gives you tax cover. Effectively you get the double advantage of additional return on a post tax basis.
Of course conventional finance also teaches that this could work to the Company's disadvantage if the return on capital employed is less than the debt cost and tax cover is a non issue if one does not make profits.
My personal experience even as recent as a couple of years , is that , if you are not a trader or a speculator , it pays to keep away from leveraged companies. If the expectations are 12-15% post tax, one will be surprised how good such a return is when you see the impact of such a return on a compunded basis , especially in the light of actual and empirical data of how the returns have been
Just to give a simple example, Rs 100 invested at 15% compounded in 5 years would be Rs 201 and at 12% the same would be Rs 176, quite a tidy sum.In the Indian market , there are shares where one can invest safely and expect that kind of returns without a perception of any serious risk.
Another caveat , even if one is ivesting in fundamentally good shares with very little downside risk is, do not invest on leveraged funds. Whether corporate or personal , Investment from borrowed funds is dangerous and puts you in a time bind. You may be right in the investment target but the point is you may prove to be right in the long term when in the short term you run out of money. You would be forced to take sub optimal decison on divestments
My favourite quote in this is of the economist Keynes.... " The markets cam remain irrational longer than you can remain solvent"........
Have seen shares like Shree Renuka. Geodesic, Subex reeling under debt.
