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Debt is something that escapes only a fortunate few, but it gives you the chills the moment the word is uttered. This is because while debt brings with it the capacity to spend a little bit more, it also bears the burden of repayment with additional interest in the future.
The same thing is applicable for corporate finance as well. Of course, companies opt for debt financing with the objective of multiplying their business growth. As long as they successfully generate higher returns than the interest they need to pay, they remain safe havens for investors.
However, with uncertainty virtually flushing down the world economy in recent times, no one can be fully sure of how a company will perform the next day. And companies bearing large amount of debts are more prone to financial crisis. Naturally, how much debt a company currently bears is a crucial part of an investment decision.
This is where the concept of “leverage” comes in. Leverage simply indicates the level of debt a corporation carries at present. The higher the degree of leverage a company carries, the more risk it bears for its investors to get caught in a debt trap.
Historically, several leverage ratios have emerged as efficient tools to evaluate a company’s credit worthiness, for potential equity investments. The most popular among them is the debt-to-equity ratio.
What is Debt-to-Equity?
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
Debt-to-equity is a liquidity ratio that indicates the amount of financial risk a company bears. A higher debt-to-equity ratio indicates that the company uses more debt financing compared to equity financing, thereby investing in its stock could prove to be risky.
Although companies reflecting high earnings growth should be ideal investment choices, those with high leverage might not generate satisfactory returns. Since a greater cohort of investors are risk-averse by nature, it is understandable that they would be more attracted to companies with low leverage than high earnings growth.
Choosing the Winning Streak
An investment strategy based solely on the debt-to-equity ratio might not fetch the desired outcome. To choose stocks that have the potential to give you steady returns, we have expanded our screening to include some other criteria.
Here are the parameters:
Debt/Equity less than X-Industry Median: Stocks that are less leveraged than their industry peers.
Current Price greater than or equal to 10: The stocks must be trading at a minimum of $10 or above.
Average 20-day Volume greater than or equal to 50000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change in EPS F(0)/F(-1) greater than X-Industry Median: Earnings growth adds to optimism, leading to a stock’s price appreciation.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.
Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five stocks from the 16 stocks that passed the screen:
Apogee Enterprises, Inc.(APOG - Free Report) : This prominent player in architectural products and services currently sports a Zacks Rank #1 and witnessed a 3.7% improvement in its current year consensus estimate in the last 30 days.
NTT DOCOMO, Inc. : This mobile communications services provider, which carries a Zacks Rank #1, witnessed a 10.8% improvement in its current year consensus estimate in the last 60 days.
Barnes & Noble, Inc. : This Fortune 500 company and the largest retail bookseller in the U.S,carries a Zacks Rank #2. It witnessed an 11.3% improvement in its current year consensus estimate in the last 30 days.
Amphaster Pharmaceuticals, Inc. (AMPH - Free Report) : This specialty pharmaceutical company holds a Zacks Rank #2. Its long-term expected earnings growth rate is 25%, which is higher than industry average of 14.6%.
Monart Casino & Resort Inc. (MCRI - Free Report) : This casino and resort services provider currently carries a Zacks Rank #1 and its long-term expected earnings growth rate is 14%, which is higher than industry average of 12.3%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
Unique Zacks Analysis of Your Chosen Ticker
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5 Low Leverage Stocks to Safeguard Your Portfolio
Debt is something that escapes only a fortunate few, but it gives you the chills the moment the word is uttered. This is because while debt brings with it the capacity to spend a little bit more, it also bears the burden of repayment with additional interest in the future.
The same thing is applicable for corporate finance as well. Of course, companies opt for debt financing with the objective of multiplying their business growth. As long as they successfully generate higher returns than the interest they need to pay, they remain safe havens for investors.
However, with uncertainty virtually flushing down the world economy in recent times, no one can be fully sure of how a company will perform the next day. And companies bearing large amount of debts are more prone to financial crisis. Naturally, how much debt a company currently bears is a crucial part of an investment decision.
This is where the concept of “leverage” comes in. Leverage simply indicates the level of debt a corporation carries at present. The higher the degree of leverage a company carries, the more risk it bears for its investors to get caught in a debt trap.
Historically, several leverage ratios have emerged as efficient tools to evaluate a company’s credit worthiness, for potential equity investments. The most popular among them is the debt-to-equity ratio.
What is Debt-to-Equity?
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
Debt-to-equity is a liquidity ratio that indicates the amount of financial risk a company bears. A higher debt-to-equity ratio indicates that the company uses more debt financing compared to equity financing, thereby investing in its stock could prove to be risky.
Although companies reflecting high earnings growth should be ideal investment choices, those with high leverage might not generate satisfactory returns. Since a greater cohort of investors are risk-averse by nature, it is understandable that they would be more attracted to companies with low leverage than high earnings growth.
Choosing the Winning Streak
An investment strategy based solely on the debt-to-equity ratio might not fetch the desired outcome. To choose stocks that have the potential to give you steady returns, we have expanded our screening to include some other criteria.
Here are the parameters:
Debt/Equity less than X-Industry Median: Stocks that are less leveraged than their industry peers.
Current Price greater than or equal to 10: The stocks must be trading at a minimum of $10 or above.
Average 20-day Volume greater than or equal to 50000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change in EPS F(0)/F(-1) greater than X-Industry Median: Earnings growth adds to optimism, leading to a stock’s price appreciation.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.
Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five stocks from the 16 stocks that passed the screen:
Apogee Enterprises, Inc.(APOG - Free Report) : This prominent player in architectural products and services currently sports a Zacks Rank #1 and witnessed a 3.7% improvement in its current year consensus estimate in the last 30 days.
NTT DOCOMO, Inc. : This mobile communications services provider, which carries a Zacks Rank #1, witnessed a 10.8% improvement in its current year consensus estimate in the last 60 days.
Barnes & Noble, Inc. : This Fortune 500 company and the largest retail bookseller in the U.S,carries a Zacks Rank #2. It witnessed an 11.3% improvement in its current year consensus estimate in the last 30 days.
Amphaster Pharmaceuticals, Inc. (AMPH - Free Report) : This specialty pharmaceutical company holds a Zacks Rank #2. Its long-term expected earnings growth rate is 25%, which is higher than industry average of 14.6%.
Monart Casino & Resort Inc. (MCRI - Free Report) : This casino and resort services provider currently carries a Zacks Rank #1 and its long-term expected earnings growth rate is 14%, which is higher than industry average of 12.3%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »