For Immediate Release
Chicago, IL – April 11, 2019– Stocks in this week’s article include WellCare Health Plans, Inc. (WCG - Free Report) , Domtar Corp. (UFS - Free Report) , Amedysis, Inc. (AMED - Free Report) , Fastenal Company (FAST - Free Report) and DMC Global Inc. (BOOM - Free Report) . Kevin Matras screens for companies showing their 'first' profit and explains why they are ones to watch.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
Buy These 5 Low-Leverage Stocks to Avoid the Perils of Debt
Leverage is an investment strategy adopted by corporations wherein borrowed capital is used to expand operations and amplify possible returns from risk capital. Per the theory of cost of capital, a company’s capital structure reflects a mix of debt and equity that is used to finance capital projects.
Empirically, most companies prefer debt financing over equity since debt is cheaper, especially in periods of low interest rates. This is because when a company resorts to debt financing, it takes on fixed expenses in the form of interest payments for a specific time period. However, in case of equity financing, a shareholder not only becomes a partial owner of the company but develops a direct claim on the company’s future profits as well.
Yet, debt financing has its share of drawbacks. The problem arises when the amount of debt a company bears becomes exorbitant. A high degree of financial leverage means high interest payments, which affect the company's bottom line.
Therefore, to safeguard one’s portfolio from notable losses, the real challenge for an investor is determining whether the organization’s debt level is sustainable. A debt-free corporation is rare to find. 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.
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 Q1 earnings around the corner, investors must be eyeing companies that have exhibited solid earnings growth in the past couple of quarters. However, blindly pursuing high earnings yielding stocks, which have a high debt-to-equity ratio, might drain all your money before you know.
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 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 to include some other factors.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/377517/buy-these-5-low-leverage-stocks-to-avoid-the-perils-of-debt
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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