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5 Stocks with Low Debt-to-Equity Ratios to Boost Your Portfolio
Equity investors often look for stocks that have historically exhibited solid growth trends. However, one must be well aware about the chosen stocks’ debt levels since a debt-ridden stock might not perform well over the long run, even if it has recorded solid growth in the recent past.
Here comes the concept of leverage, which refers to the use of exogenous funds by companies to run their operations smoothly and expand the same. It is imperative to mention in this context that although there is an option for equity financing, the majority of companies opt for debt financing to obtain such exogenous funds.
However, the level of debt financing plays a crucial role in a stock’s performance because if too much debt is opted for by a company there lies the risk of default. This is because debt financing means borrowing against future earnings, which simply means that instead of using all future profits to grow the business, one has to allocate a portion for repayments.
So, for a prudent investor, a safe strategy of choosing stocks should also include search for stocks that bear low leverage, apart from other factors. Therefore, measuring the leverage of a particular stock forms an integral part of the safe investment procedure.
Historically several leverage ratios have been developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
Analyzing Debt/Equity
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A company with a lower debt-to-equity ratio shows improved solvency for a company.
With this year’s first-quarter reporting cycle already past the halfway mark, investors might be eyeing stocks that have exhibited solid earnings growth in the recent quarters. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, its so-called booming earnings picture might turn into a nightmare.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has more than doubled the market from 1988 through 2016. Its average gain has been a stellar +25% per year. See these high-potential stocks free >>.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks.com featured highlights include: DAQO New Energy, Louisiana Pacific, Nucor Corp, West Pharmaceutical Services and PulteGroup
Chicago, IL – May 7, 2021 – Stocks in this week’s article are DAQO New Energy Corp. (DQ - Free Report) , Louisiana Pacific Corp. (LPX - Free Report) , Nucor Corp. (NUE - Free Report) , West Pharmaceutical Services (WST - Free Report) and PulteGroup Inc. (PHM - Free Report) .
5 Stocks with Low Debt-to-Equity Ratios to Boost Your Portfolio
Equity investors often look for stocks that have historically exhibited solid growth trends. However, one must be well aware about the chosen stocks’ debt levels since a debt-ridden stock might not perform well over the long run, even if it has recorded solid growth in the recent past.
Here comes the concept of leverage, which refers to the use of exogenous funds by companies to run their operations smoothly and expand the same. It is imperative to mention in this context that although there is an option for equity financing, the majority of companies opt for debt financing to obtain such exogenous funds.
However, the level of debt financing plays a crucial role in a stock’s performance because if too much debt is opted for by a company there lies the risk of default. This is because debt financing means borrowing against future earnings, which simply means that instead of using all future profits to grow the business, one has to allocate a portion for repayments.
So, for a prudent investor, a safe strategy of choosing stocks should also include search for stocks that bear low leverage, apart from other factors. Therefore, measuring the leverage of a particular stock forms an integral part of the safe investment procedure.
Historically several leverage ratios have been developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
Analyzing Debt/Equity
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A company with a lower debt-to-equity ratio shows improved solvency for a company.
With this year’s first-quarter reporting cycle already past the halfway mark, investors might be eyeing stocks that have exhibited solid earnings growth in the recent quarters. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, its so-called booming earnings picture might turn into a nightmare.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1510106/5-stocks-with-low-debt-to-equity-ratio-to-boost-your-portfolio
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has more than doubled the market from 1988 through 2016. Its average gain has been a stellar +25% per year. See these high-potential stocks free >>.
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.