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“Solving a problem created by debt... by creating more debt is a fool's errand” – Olivier Sarkozy
Debt financing is a common practice that companies with limited cash resources resort to while expanding their operations. Often companies choose debt financing over equity financing as the former provides funding at lower rates, especially in periods of historically low interest rates.
However, too much debt is unhealthy for a company. As a company increases debt, interest payments increase and weigh on its earnings per share. This in turn makes the company a less likely option for investment.
No doubt, while asserting a company’s creditworthiness or financial stability, analysts will choose those that have a low financial leverage (amount of debt a company bears).
The most common metric that analysts use to estimate how much debt a company currently bears is debt-to-equity ratio.
The Ratio
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
Basically, the debt-to-equity ratio is a liquidity ratio that specifies the amount of financial risk that a company faces. A lower debt-to-equity ratio points to a more financially stable business and thereby a more worthy investment option.
In times of macroeconomic and sociopolitical turmoil, highly leveraged stocks are more vulnerable to financial distress and the worst case scenario may lead to insolvency. So instead of blindly going after stocks that are exhibiting a surge in earnings, which might be short lived, one must target those that bear a low debt-to-equity ratio and are thus financially sounder.
The Winning Strategy
To brace ourselves from any sudden turbulence in the stock market, choosing low leverage stocks will be a wise strategy.
However, 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 criteria.
Here is the final screen:
Debt/Equity less than X-Industry Median: Those stocks that are less leveragedthan their industry peers.
Current Price greater than or equal to 5: The stocks must be trading at a minimum of $5 or above.
Average 20-day Volume greater than or equal to 50000: Asubstantial 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 matterwhether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
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 or 2 offer the best upside potential.
Although 45 stocks passed the screen, we have eliminated those with a negative or a zero debt-to-equity ratio.
Here are five stocks from the final 21 that have a favorable debt-to-equity ratio:
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 »
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Add These 5 Low Leverage Stocks to Your Portfolio
“Solving a problem created by debt... by creating more debt is a fool's errand” – Olivier Sarkozy
Debt financing is a common practice that companies with limited cash resources resort to while expanding their operations. Often companies choose debt financing over equity financing as the former provides funding at lower rates, especially in periods of historically low interest rates.
However, too much debt is unhealthy for a company. As a company increases debt, interest payments increase and weigh on its earnings per share. This in turn makes the company a less likely option for investment.
No doubt, while asserting a company’s creditworthiness or financial stability, analysts will choose those that have a low financial leverage (amount of debt a company bears).
The most common metric that analysts use to estimate how much debt a company currently bears is debt-to-equity ratio.
The Ratio
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
Basically, the debt-to-equity ratio is a liquidity ratio that specifies the amount of financial risk that a company faces. A lower debt-to-equity ratio points to a more financially stable business and thereby a more worthy investment option.
In times of macroeconomic and sociopolitical turmoil, highly leveraged stocks are more vulnerable to financial distress and the worst case scenario may lead to insolvency. So instead of blindly going after stocks that are exhibiting a surge in earnings, which might be short lived, one must target those that bear a low debt-to-equity ratio and are thus financially sounder.
The Winning Strategy
To brace ourselves from any sudden turbulence in the stock market, choosing low leverage stocks will be a wise strategy.
However, 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 criteria.
Here is the final screen:
Debt/Equity less than X-Industry Median: Those stocks that are less leveragedthan their industry peers.
Current Price greater than or equal to 5: The stocks must be trading at a minimum of $5 or above.
Average 20-day Volume greater than or equal to 50000: Asubstantial 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 matterwhether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
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 or 2 offer the best upside potential.
Although 45 stocks passed the screen, we have eliminated those with a negative or a zero debt-to-equity ratio.
Here are five stocks from the final 21 that have a favorable debt-to-equity ratio:
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 »