Buy These 5 Low Leverage Stocks For Safe Investing

Leverage is something that constitutes an integral part of running a business. But failing to understand its complexities can prove to be detrimental. With capital being one of the basic factors of production, companies need exogenous funds to finance their corporate expenses, run operations smoothly as well as expand the realm of their business.

Among equity and debt – the two most common options used to boost a company’s future earnings – debt is more popular. This is perhaps due to the cheap and easy availability of debt over equity financing.

However, resorting to debt is still considered a taboo as it carries the burden of interest payments.

In this context, it is imperative to note that the debt scenario in the United States is quite disturbing at this moment. Huge spending on wars, big tax cuts and stimulating economic programs have all added to the nation’s burden over the years. The Congressional Budget Office estimates that the debt held by the public will rise to 150% of the economy’s GDP in 2047 from 77% currently.

Nevertheless, this should not shift investor attention from U.S. stocks since debt has been part of the economy since its foundation and yet the country boasts the largest stock market in the world. What investors need to do is choose stocks with caution, avoiding those with high debt loads.

This is where the significance of financial leverage ratio comes into play as it measures the extent of financial leverage a company bears. To choose a corporation that is not so heavily indebted, several leverage ratios have been developed over the years, with the debt-to-equity ratio being the most popular.

Analyzing Debt/Equity

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.

Now investors must be eyeing companies that have exhibited solid earnings growth in recent times. But, in the uncertain world of investment, markets can falter, particularly affecting companies with a higher degree of financial leverage. Therefore, investing in stocks displaying solid earnings growth and not considering their debt level is not a wise move.

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.

Here are the other parameters:

Debt/Equity less than X-Industry Median: 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.

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Written By: Zacks Investment Research