I don’t mean to be repetitive, but I just want to say another few words about the debt to capital ratio. Using Morningstar’s charting system (by the way, Morningstar has a nicely redesigned website), I created a chart that compares Stifel Financial (SF) to Citi (C). More specifically, the chart shows the returns of SF and C (as indicated by the lines) along with the debt/total capitalization of each (as indicated by the bars).
Over the past 10 years, Citi’s debt to capitalization ratio has often been more than double or triple Stifel’s. This served Citi fairly well while times were good and credit was easy to obtain. During 2007, Citi increased the dept to capital ratio while Stifel decreased their ratio. Citi’s stock declined while Stifel’s increased.
A high debt to capital ratio is just one sign of Citi’s precarious financial position just as a very low ratio was a sign of Stifel’s strength, but in times of tightening credit and assett deflation it seems to me that the ratio takes on more significance compared to other quantitative factors. I know this is probably a very “apples to oranges” and unfair comparison as the two companies differ greatly in size and scope, but I still think the comparison can serve as a lesson that financial strength is of paramount concern in times of crisis.
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