Nam Tai Elec. (NTAI) Message Board

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Technology Stocks : Nam Tai Elec. (NTAI)

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To: Hectorite who wrote (1495)	9/17/1998 3:37:00 PM
From: Norman H. Hostetler	Read Replies (1) of 1696

"Gearing" is British English and means "leverage" in American English. At present, there is apparently $4.36 of debt for every $1 of capital. Leverage (or "gearing") can dramatically increase your return on equity, provided that the percentage net profit earned on invested debt exceeds the interest rate on the debt. Fluctuations in interest rates or profitability can produce dramatic losses, too. High leverage substantially increases risk. Think of it in the same way as using margin to buy more stock--this can be very profitable as long as stocks are going up rapidly, but it's a disaster in stagnant or falling markets. The very low net profit margin that several people have commented on would make me want to look very closely at how the debt is being used by this company--it doesn't seem to be producing significant profits. Therefore, either the company needs to be restructured to focus on more profitable areas, or the debt has to be substantially reduced (and a reduction to 356% of equity does not strike me as substantial) in order to reduce interest expense. If reducing interest expense increases net profit margin, then for sure the company has not been investing debt wisely. =+=+=Norm

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