Buy These 5 Low Leverage Stocks For A Safe Portfolio

“Every time you borrow money, you’re robbing your future self.” – Nathan W. Morris

Of course, since capital is one of the basic requirements of production, companies – especially those with a dearth of resources – often resort to debt financing to boost up their future earnings. This is because equity financing is relatively costlier. Another perk to debt financing is that the interest expense is tax deductible.

However, for a safe investment strategy, understanding the amount of financial leverage that a company bears is crucial. This is because financial leverage multiplies the underlying business risk. So, while financial leverage brings with it the expectation of increased return in the future, it also carries the risk of losing money substantially. In fact, in any unfavorable turn of events, exorbitant debt financing bears the risk of dragging a company into bankruptcy.

For the purpose of safe investment in stocks, varied parameters based on leverage ratio have been constructed historically. These parameters serve the purpose of estimating the credit worthiness of a company. One such prominent tool is debt-to-equity ratio.

What is Debt-to-Equity Ratio?

Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity

In simple terms, debt-to-equity is a solvency ratio that measures a company’s debt position and its ability to pay interest. A lower debt-to-equity ratio greatly contributes to an investor’s confidence in a company’s financial stability.

This is because a high debt-to-equity ratio indicates a huge level of repayment that the company has to make in connection with the large debt amount, which had once exploded its earnings. This in reality, makes the company’s so-called solid earnings extremely volatile.

Choose the Right Strategy

Instead of blindly targeting high earnings yielding stocks, it is wise for investors to pour money in low leverage stocks.

However, choosing stocks based solely on one financial metric might not fetch the desired outcome. To ensure maximum possible return from this strategy, we have expanded our screening procedure to include some other criteria.

Here is the final screen:

Debt/Equity less than X-Industry Median: Those 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.

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 matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.

Zacks Investment Research

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Written By: Zacks Investment Research