Dear Friends,

Have you ever think that still Do You_Believe_Debt_Free_Companies_Are_Always_The_Best?

"This company has absolutely no debt, sir..."
Upon hearing this single line...
What is the immediate reaction of our minds?
"That means it's a safe company with low risk. It's a good place to invest."
You aren't the only one who thinks this way...
Hundreds of thousands of retail investors share this exact sentiment.

However...
In reality, the market doesn't work that way.
Let’s look at a quick story...

Suppose I have ₹1 crore.

I start a business with it.
After a year...
My business has generated a profit of ₹6 lakhs out of my capital with the sales.

Yet, my debt stands at zero; I earned that ₹6 lakh profit without borrowing even a single rupee.

If you were to ask, "Am I a successful entrepreneur?"... the answer is definitely no.

Why?

Because...

Even though I had ₹1 crore... I didn't know how to put it to work effectively for me. 

Now, let’s consider my friend...

He also has ₹1 crore.

He borrows an additional ₹50 lakhs from the bank.

With a total capital of ₹1.5 crores...
He builds a new factory...
He purchases new machinery...

The business expands, creating new capacity and acquiring new customers.

After a year, his business profit is ₹37 lakhs (an ROCE of 25%).

He has paid the interest on the loan to the bank.
He is still left with a substantial profit.
Now, tell me...
Who is the better businessman?
Me—the one with no debt?

Or...

My friend, who utilized debt to create greater value?
This is the biggest mistake retail investors make.
They get scared the moment they see the word "debt."
Yet... many of the world's largest companies... still borrow money today.

Why?
Because... they understand one thing.
Debt is not a problem. How we utilize it is what matters.
Debt, when used correctly...
...is not an expense.

It is a growth engine.
Let us now see how to view this by "connecting the dots."
A company has debt...
The first question we must ask is...
"Where did that debt go?"
Did they build a new factory?
Did they buy new machinery?
Did they increase capacity?

In other words...
...did the borrowed debt transform into company assets?
This is the first dot we need to connect:
Debt / Assets
The next question...

"Are the assets acquired using that debt actually working?"
If a factory is built but simply kept locked up... it is not an asset; it is a "dead investment."
But... if that same factory drives high production...
...and generates high sales...
...then that asset is truly working.
This is what the Asset Turnover Ratio tells us.

The second dot we need to connect:
Debt / Assets / Sales
Now, the third question...
Sales have been generated using the assets—fair enough...
...but does that sales figure translate into profit?

Even if a company has sales of ₹1,000 crore... if there is no profit, that growth is meaningless.
ROCE (Return on Capital Employed) tells us about the ability to convert investment—utilizing assets—into profit.
So, the third dot we need to connect:
Debt / Assets / Sales / Profit

Now, look at the complete picture.
1) Debt
Indicates how much debt the company has raised.
2) Asset Turnover Ratio
Indicates whether the assets acquired through that debt are actually generating sales.
3) ROCE
Indicates whether those sales ultimately create wealth for the shareholders.
This is the true "connecting the dots."
A metric viewed in isolation... conveys only a single piece of information.

But when viewed alongside other points... it tells the company's entire story.
That is why...
...professional investors...
...do not simply ask, "Does the company have debt?" They...
Even when a company borrows money...

Do they convert it into assets?
Do those assets generate sales?
Do those sales yield a good return?
They examine the entire journey.

Here is a simple formula to remember this:
1) Zero Debt + Low Asset Turnover + Low ROCE
= Capital is being wasted.
2) Moderate Debt + High Asset Turnover + High ROCE
= Smart Capital Allocation.
= Smart Management.
= Long-term Wealth Creation.

From now on... when you look at a company...
Do not rejoice simply because it has "Zero Debt."

Instead... ask just these four questions:
1) Why did they borrow?
2) What assets were created using that debt?
3) Do those assets generate high sales?
4) Do those sales translate into a good ROCE?

The answers to these four questions...
Reveal the true quality of a company.
A retail investor looks at a single number.
A professional investor looks at a ratio.

But... what an institutional investor does is...
They do not look at any single ratio in isolation.
The only thing they look at is...
Debt + Assets + Sales + Profit + Shareholder Wealth...
...this entire chain.

The perspective that views this chain...
Is about "connecting the dots."
That is the mindset that transforms an investor...
From an ordinary investor into a professional investor.

Happy investing!