Olam International

[specuvestor]

Besides matching Asset-Liability-Management (ALM), cashflow to repay and interest cover is important. For the lender it is also about collateral (if it's massively overcollateralised the previous discussion is moot) and business model. That's why IIRC even Modigliani realize that the optimal debt structure for different industry is different. I like Clement's idea of cash flow sharpe ratio theoretically but I'm not sure how effective this is in reality cause commodity prices tends to trend and not normal distribution.

If an asset is $100 and returns $10, both A&B companies buys it with $100 equity will have same return and same valuation.

But if A leverages by borrowing $100 now A will have $20(minus interest cost) income while B remains $10 income. The ROIC is the same $20/$200 and $10/$100 but the ROE and more importantly the cashflow differs. That's why businesses leverage, especially so if the margin is low eg $1 per $100. They don't just look at shareholders' or lenders' point of view. I would think the sharpe ratio is similar so the ratio alone might overestimate the expected future cashflow without considering the capital structure.

As long as one is in debt, it is a matter of trust. Even banks that loses trust in a crisis will succumb to bank runs. Olam and Noble are no different. If a person has $100 and his cheque clears for $99, he is still trusted. A person of $100k but cheque fails to clear for $$100,001 he is distrusted. It's perception.

CF optimum debt is no debt or no net debt, but that's just me...

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I recommend no debt or net cash for individuals cause life is too short to stressed out by overleverage. But for companies it will just encourage complacency. Remember the TLC before the new mandate, or those cash rich companies sitting around and major shareholders not doing anything to the Structure part of the ABS