Last time I spoke to you about Slack, it had no debt.
Since then it raised $750 million in debt.
This has caused some to say that Slack is no longer shariah-compliant since its debt-to-equity ratio is now close to 70%.
These commentators argue that a debt-to-equity ratio of above 30% (and sometimes above 33.3% depending on who you ask) is not halal.
I pointed out in my video/article: “How to find halal stocks” that this claim is completely without merit in either the Quran or Sunnah.
The only real limit to interest on debt in Islam is zero.
Tolerating any amount of interest on debt in the operations of the companies we invest in is done as a necessary consequence of the ubiquity of interest-bearing debt.
Coming up with random new hard limits is not constructive.
Further, debt isn’t even prohibited in Islam.
So why are these commentators focused on debt-to-equity?
It makes much more sense to look at the amount of interest the company pays/receives rather than the dollar amount of debt.
Relying on Debt-to-Equity to guage if a particular stock is halal or haram to invest in leads to some bizarre conclusions.
Designating Slack’s stock as haram to invest in is just one example.
The actual interest on Slack’s $750 million in convertible notes is 0.5%
Assume that instead of $750 million at .5% interest, Slack had raised $200 million in debt at 7% interest.
In case Slack raised $200 million in debt its Debt-to-Equity ratio would be ~23%.
Since 23% is less than the made-up 33.3% Debt-to-Equity limit, Slack would be deemed a halal investment.
Yet in the case of $200 million in debt at 7% interest, Slack would be paying $14 million in interest annually compared with only $3.75 million in interest they pay now with their $750 million in debt at 0.5% interest.
So according to this Debt-to-Equity criteria, Slack is haram to invest in when it pays $3.75 million in interest but halal to invest in when it pays 4 times as much in interest!
Does this make any sense to anyone?
I don’t think so.
I encourage people who are using the debt-to-equity ratio as a metric for judging the halalness of a company to stop doing so.
It is inaccurate and causing many Muslim investors to shoot themselves in the foot unnecessarily.
As for Slack, I maintain a high halaness rating for its stock at 9/10.
This high rating is due to Slack’s revenue being close to entirely halal and their interest expense being minimal in relation to their size.
Disclaimer 1: this is not investment advice. Make sure you do your own due diligence before making any investment decisions. Don’t invest money you can’t afford to lose.
Disclaimer 2: The writer of this article holds a long position in Slack’s common stock.