Debt is just a tool, and can be good or bad for a business.

With respect to Amazon’s quoted liabilities please note not all of this balance is funded bank debt. Much of the balance represents Amazon Prime liabilities i.e. membership fees they receive up front but then have to provide the service for over the course of the year. In Warren Buffett parlance, the definition of “Other People’s Money”.

Funding sources such as this are very much preferred to traditional bank funding sources as their cost is lower, it doesn’t come with charges over assets, personal guarantees, is non callable etc.

Now to your business. A preferable retailer financing position is to have your creditors fund your inventory. In which case your trade creditor balance hovers a bit over your rolling inventory balance meaning they fund the inventory and you pay them back out of the cashflow as you sell their stock.

I appreciate that will come down to the specifics of your business but in general if you can get to this position, you can scale the working capital side easily enough of a retailer (assuming you don’t sell on credit, rather cash) without having to tie up your profits in working capital (i.e. it is your cash balance that should be growing).

With respect to using leverage. I would first calculate the return on assets that your business is generating. This is your net profit margin (after tax) multiplied by your asset turnover (revenue/total assets employed in business). This % represents your Return on Assets or RoA.

If this RoA is greater than the cost of your funding, then it makes sense (to a point) to leverage your assets using debt financing, as it will increase your return on equity as a shareholder. I appreciate everyone has their own appetite for using debt as a funding source, so this to some extent is a personal preference.

But if say your RoA is 10% and your cost of debt is 6% than using debt to part fund the assets employed in your business, improves your overall return (you give up some profits due to interest expenses, but make it back having to invest less capital in your business).

If on the other hand, your RoA is less than the cost of your debt liabilities, using leverage actually destroys shareholder value. Here you’d be better off either a) getting rid of debt funding and or b) trying to raise your RoA through your business operations.

To me the use of debt is more nuanced than simply saying “no i will not use debt ever” etc, depending on your business it can make great sense to use.

The leveraged return on investment formula if your interested is the following

RoA% + (Debt/Equity * (RoA-Cost of Liabilities))

where RoA = net profit margin (npm%) * Asset turnover (total revenue / total assets) & where Debt/Equity is the “leverage ratio” employed in the business

A quick shorthand to know whether debt makes sense to use is this, if the unleveraged return on assets is less than the cost of debt, any leverage or debt employed is detrimental to the business. It is only when the Return on the Assets that the debt part finances is more than the cost of debt, does it make sense to use leverage.

I hope that helps. Best of luck.

A bit about me, I’m a Big 4 chartered accountant, moved into corporate finance (renewable asset buying/selling/financing), most recently being running my own private investment partnership and am based in Europe. Curious to know more specifically what kind of partnership are you thinking of, have you a product / business in mind or are just open to the idea of finding a partner?