DigiTel, who owns Sun Cellular, seems to be a gaining a lot of interest. P/E at 40.5 is quite high compared to its competitors Globe at 9.4 and PLDT (who owns Smart) at 12.6. Apparently, quite a few people believe that the company is worth a lot.
But one thing that’s holding others back, is that DigiTel has loads of debt. Debt can actually be good especially if you’re setting up infrastructure which takes time to mature and start earning. Allow me to illustrate:
- DGTL has 87B in assets mainly in infrastructure. Say D is 85.5B, E is 1.5B, D/E is 57. If income is 145M, ROA is 0.17%, ROE is 9.67%.
- Now if say D and E is evenly 43.5B each and income is 145M, ROA is still 0.17%, but ROE is a dismal 0.33%.
Remembering that your share of stock is equity, which would you rather have?
Another thing is if DGTL goes belly up, how much do stockholders lose? Is it better to lose 1.5B vs 43.5B? I guess that sufficiently settles it: Debt can actually be good.
A high D/E does seems alarming, but does it look like DGTL is alarmed? Are creditors and suppliers alarmed? Or are there still creditors and suppliers willing to lend and sell? Maybe someone can tell me.