Zacks.com Featured Highlights Include: Manulife, Gibraltar, Omnicell, SolarEdge And Career Education
Zacks Investment Research | Nov 24, 2019 09:30PM ET
For Immediate Release
Chicago, IL – November 25, 2019 - Stocks in this week’s article are Manulife Financial (NYSE:MFC) , Gibraltar Industries (NASDAQ:ROCK) , Omnicell (NASDAQ:OMCL) , SolarEdge Technologies (NASDAQ:SEDG) and Career Education Corp. (NASDAQ:CECO) .
Buy These 5 Low-Leverage Stocks to Keep Your Portfolio Safe
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 the 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.
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, to protect one’s portfolio from notable losses, the real challenge for an investor is to ascertain if an organization’s debt level is sustainable.
A debt-free entity is rare to find. Historically, several leverage ratios are developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
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.
With the Q3 reporting cycle over for majority of sectors, an investor must be looking for solid growth stocks. However, blindly investing in stocks displaying solid earnings growth, without considering their debt level, might not be a wise move. As uncertainty can hit the global equity market any time, it is reasonable to expect that investors will be more attracted to companies with low leverage than high earnings growth.
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