For Immediate Release
Chicago, IL – July 1, 2019 - Stocks in this week’s article are Atmos Energy Corp. (ATO - Free Report) , James River Group Holdings, Ltd. (JRVR - Free Report) , AZZ Inc. (AZZ - Free Report) , WellCare Health Plans, Inc. (WCG - Free Report) and Oasis Midstream Partners LP (OMP - Free Report) .
Buy These 5 Low-Leverage Stocks to Avoid Investment Risk
Companies often need exogenous funds to ensure smooth operations and expansion of business. These funds can be arranged through debt and equity. Here comes the concept of leverage, which is basically the usage of debt for such purposes.
Now a comparative analysis of the theory of cost of capital reveals that 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. So, debt financing remains the preferred option for corporates.
However, debt financing has its share of drawbacks. The problem arises when leverage, referred to as 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 avoid any kind of risky investment, choosing a less debt-ridden stock should be an appropriate option for a risk-averse investor. And here comes the importance of leverage ratios, which can measure the exact amount of debt risk a company bears. Debt-to-equity ratio is one such measure, perhaps the most popular one, to evaluate a company’s creditworthiness for potential equity investments.
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.
Investors are on the lookout for stocks that exhibited solid earnings growth in the last couple of quarters. However, blindly investing in stocks displaying solid earnings growth without considering their debt level is not a wise move.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/435510/buy-these-5-low-leverage-stocks-to-avoid-investment-risk
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