After understanding more about borrowings, let us look at what might happen to a company in the event that they had high borrowings:-
Well let's quote the Sino-Environment as an example, it's ex-CEO Sun JiangRong pledge his stake on the company to secure his own personal loan and due to the bad market conditions, it triggers a force-sell which caused him to lose control of the company entirely. To make things worse, the company is unable to pay off their bondholders and triggers a default in bond payment. All these events results in the suspension of the stock counter from trading in the stock exchange. Hence, we must always ensure that the company is in a healthy condition and have enough to pay off their borrowings on time before we buy any shares to ensure that we will not become a victim of the Sino-Environment case.
So how are we supposed to know if the company shows any signs of such incident? In fact, months before the suspension of that company's stock counter, the news on potential risk in terms of the company's ability to repay the upcoming bond was out.
Just do a google search on the news available for the company you are interested in purchasing, and if there's any bad news about it, take note and do further research on it to ensure your security before making any decision, especially the buying decision. Do a check every 3 months along with the reviewing of their quarterly financial report, as well. The bottom line is ... Always be safe than sorry. :)
Sometimes, no news is good news.
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