For Immediate Release
Chicago, IL – May 4, 2020 - Stocks in this week’s article are NextEra Energy (NEE - Free Report) , Franco-Nevada Corp. (FNV - Free Report) , Amedysis, Inc. (AMED - Free Report) , Atmos Energy (ATO - Free Report) and Costco Wholesale Corp. (COST - Free Report) .
Bet on These 5 Low Leverage Stocks to Avoid Huge Losses
Leverage is a well-known business strategy to use borrowed funds for financing the purchase of inventory, equipment and other company assets. These funds can also be utilized to repay a company’s prior debt. Companies can obtain such funds either using debt or equity.
Historically, debt financing has been preferred over equity. This is because when a company resorts to debt financing, it incurs 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 company’s partial owner but also gets entitled to a direct claim to its future profits.
Now, the current market situation might seem to be a perfect time for investors to be cheerful, as economic downturn caused by the novel coronavirus outbreak has forced the Federal Reserve to lower the nation’s interest rate to 0%.
Yet, debt financing has its share of drawbacks. Particularly, one should keep in mind that debt financing is a feasible option as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even cause a corporation’s bankruptcy in a worst-case scenario.
A high degree of financial leverage means heavy interest payments, which affect a company's bottom line.
Therefore, the debt level of a company is an important point of consideration while making an investment decision.
Several leverage ratios have emerged as efficient tools to evaluate a company’s credit level to support prudent equity investments. The most popular among them is the debt-to-equity ratio.
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 in full swing, 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 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/910762/bet-on-these-5-low-leverage-stocks-to-avoid-huge-losses
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