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Choose These 5 Low Leverage Stocks to Avoid Debt-Related Risk
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Leverage is a well-known concept in corporate finance that refers to the practice of borrowing capital by companies to run their operations smoothly and expand the same. Notably, such borrowings can be made either through equity financing or debt financing.
Now, a comparative analysis reflects that debt financing has been historically preferred over equity because of its easy and cheap availability.
Another perk of debt financing is that the interest on debt is tax deductible.
However, debt financing is not always desirable. In particular, debt financing becomes a threat if it fails to generate a higher rate of return than the interest rate. So, while choosing equities, a prudent investor should pay attention to the debt level that a company bears.
In particular, a risk-averse investor should buy stocks that bear low leverage since a debt-free corporation is rare to find. Therefore, measuring the leverage level 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 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.
Most of the times investors go for 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.
The Winning Strategy
Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.
However, an investment strategy based solely on 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 criteria to include some other factors.
Here are the other 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.
VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation
Zacks Rank #1 or 2: Irrespective of market conditions, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 24 stocks that made it through the screen.
Imperial Oil Limited (IMO - Free Report) : It is one of the largest integrated oil companies in Canada, mainly engaged in oil and gas production, petroleum products refining and marketing and chemical business. The company delivered an earnings surprise of 16.68%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently.
Stepan Company (SCL - Free Report) : It is a major manufacturer of specialty and intermediate chemicals used in a broad range of industries. The company currently carries a Zacks Rank #2. It delivered an earnings surprise of 27.5% in the trailing four quarters, on average.
Piper Sandler Companies (PIPR - Free Report) : It is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The company came up with a four-quarter earnings surprise of 119.60%, on average, and sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
DAQO New Energy Corp. (DQ - Free Report) : It is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. Currently, the company carries a Zacks Rank of 2 and came up with a four-quarter earnings surprise of 155.63%, on average.
Targa Resources (TRGP - Free Report) : It is a premier energy infrastructure company. The company currently sports a Zacks Rank #1 and delivered a four-quarter earnings surprise of 115.93%, on average.
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.
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Choose These 5 Low Leverage Stocks to Avoid Debt-Related Risk
Leverage is a well-known concept in corporate finance that refers to the practice of borrowing capital by companies to run their operations smoothly and expand the same. Notably, such borrowings can be made either through equity financing or debt financing.
Now, a comparative analysis reflects that debt financing has been historically preferred over equity because of its easy and cheap availability.
Another perk of debt financing is that the interest on debt is tax deductible.
However, debt financing is not always desirable. In particular, debt financing becomes a threat if it fails to generate a higher rate of return than the interest rate. So, while choosing equities, a prudent investor should pay attention to the debt level that a company bears.
In particular, a risk-averse investor should buy stocks that bear low leverage since a debt-free corporation is rare to find. Therefore, measuring the leverage level 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 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.
Most of the times investors go for 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.
The Winning Strategy
Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.
However, an investment strategy based solely on 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 criteria to include some other factors.
Here are the other 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.
VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation
Zacks Rank #1 or 2: Irrespective of market conditions, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 24 stocks that made it through the screen.
Imperial Oil Limited (IMO - Free Report) : It is one of the largest integrated oil companies in Canada, mainly engaged in oil and gas production, petroleum products refining and marketing and chemical business. The company delivered an earnings surprise of 16.68%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently.
Stepan Company (SCL - Free Report) : It is a major manufacturer of specialty and intermediate chemicals used in a broad range of industries. The company currently carries a Zacks Rank #2. It delivered an earnings surprise of 27.5% in the trailing four quarters, on average.
Piper Sandler Companies (PIPR - Free Report) : It is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The company came up with a four-quarter earnings surprise of 119.60%, on average, and sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
DAQO New Energy Corp. (DQ - Free Report) : It is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. Currently, the company carries a Zacks Rank of 2 and came up with a four-quarter earnings surprise of 155.63%, on average.
Targa Resources (TRGP - Free Report) : It is a premier energy infrastructure company. The company currently sports a Zacks Rank #1 and delivered a four-quarter earnings surprise of 115.93%, on average.
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.