At a time when considerable risks exist across the economy and for business in general, it is worth contemplating how successful companies thrive.
It provides lessons, too, for how individuals and families should manage their finances.
When building businesses, companies have to balance the desire to expand with having access to the finances needed for associated investment.
Buying a business or committing to a major capital expenditure programme, for example, requires the deployment of internally generated cashflow or the use of fresh borrowings or equity.
If successful, that investment generates returns that reward shareholders while expanding the company.
If unsuccessful, not only can profits decline, but the entire business can be put at risk if excessive debt transpires.
Over the past decade, we have seen many management teams and their boards that hold overly optimistic views on the future, only to overextend themselves and their companies.
Contrast that with companies that adopt a more conservative approach. By keeping balance sheets strong, and having debt at low levels, companies can absorb the pressures that occur when economic conditions deteriorate, while having the resources to exploit opportunities as they evolve.
Just look at how Kerry, Paddy Power, and Ryanair conduct their business.
All three are leaders in their markets, not just in Ireland but worldwide. At the same time all three have either very low levels of debt, in Kerry’s case, or actually have net cash on their balance sheets.
This means they are positioned to invest when others are struggling.
Currently, you can see, for example, that Kerry is spending large sums of money on organically improving the IT and operational platform of its entire business across the globe.
Paddy Power is selectively expanding in to new markets such as Australia without compromising its balance sheet materially. Ryanair continues to buy aircraft despite the recessionary challenges across Europe and the high cost of fuel.
By committing capital in this way during a time of duress, these companies are growing their footprints while others disappear. Paddy Power is producing record profits while competitors, including Celtic in Ireland, close.
Ryanair expands in Europe while airlines, including Spanair and Malev, collapse. Kerry continues to lift its earnings by 10% per year while consumer food companies in the UK collapse.
The disciplined approach to building a business has lessons for individuals and governments alike. Taking on too much debt during an economic boom is a disaster in waiting, as we have discovered to our cost in Ireland over the past five years. Basing expenditure on tax receipts fuelled by economic buoyancy is another trap Irish politicians fell in to over the last decade.
UPOD is a term we use in the stock market to describe executives that under-promise and over-deliver. Have expectations at low levels and the potential exists to surprise positively. Have it the other way around and credibility can be torched very quickly. If you monitor the behaviour of our leading companies you will find they adopt very conservative attitudes to debt and are past masters at the UPOD philosophy.
You, I and our Government should think the same way. It would battle-proof all of us from the storms that currently prevail over Europe.
* Joe Gill is director of research with Bloxham Stockbrokers
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