Ann: Half Year Report, page-10

"Hopefully I've got that right or kind of."

Yes. I think that's the broad gist of what I was trying to say".


"I'm used to companies wanting to try and pay down their Debt, this doesn't seem to be a priority of AZJ's for whatever reason and no concern for anyone.....would there by any significant benefits of them trying to pay down the Debt or not really in your opinion?"

Well, as a general rule, I prefer companies in which I invest to have less, rather than more, debt. But that's just me having a genetic aversion to owing money to other entities. (Ironically, though, if you checked, you might see me posting today on a company of which I am an owner - TCL - which is absolutely riddled with debt... but that is an exceptional case.)

Back to the question of AZJ's debt:

No matter what management say, AZJ is a company in that it has limited opportunities for organic revenue growth. Therefore the only calls on the capital the company generates is to keep the business going (i.e., maintenance capex) and to return surplus capital to shareholders.

As was demonstrated in an earlier post, the company's current level of debt is easily manageable.

Broadly speaking, the company can effectively continue to pay out 100% of its profits, and the company's capital structure will be maintained. [*]

It is therefore in a state of capital flow equilibrium.
One could therefore say it has an optimal capital structure.

Of course, what the company's management could do is reduce the dividend and apply some of the capital it generates to reducing borrowings.

The problem with that is - at the current low interest rates - it will not result in a materially lower interest expense and, hence, the after-tax earnings benefit will be marginal.

So, not a great outcome for shareholders:
Less money in their pockets, for negligible earnings benefit.

(Of course, there are some intangible benefits to lower levels of borrowings, such as lower financial risk, but given that the current levels of borrowings are not a problem for AZJ in terms of servicing ability, lower financial risk is not really a pressing requirement.)


Personally, I think that it would make only really make sense for AZJ to reduce dividends in order to pay down debt if there was a material increase in the cost of debt or if there was some perceived structural threat to the company's earnings base.

So, in a theory, the company can continue with its current debt structure for years to come.
(Of course, in the real world, things don't remain constant for long periods at a time. )


[*] Of course, as was explained earlier, due to some accounting technicalities the company can pay out 100% of its profits and it will have a few tens of millions of dollars left over... with which it can do other value-accretive things, such as buy back its own shares, and thereby "induce" some earnings growth.