For Immediate Release
Chicago, IL – May 21, 2018 - Stocks in this week’s article Louisiana-Pacific Corp. LPX, Amedisys Inc. AMED, MGM Growth Properties LLC MGP, Oshkosh Corporation OSK and Federated National Holding Company FNHC.
Buy These 5 Low-Leverage Stocks to Strengthen Your Portfolio
In the world of business finance, leverage refers to an investment strategy that involves borrowing of funds to finance the expansion of the business, purchase of inventory and other assets as well as supporting other aspects of business operations. Financial leverage is the amount of debt that exists in the capital structure of a company.
Per the theory of cost of capital, a company’s capital structure reflects a mix of debt and equity used to finance its capital projects. A comparative analysis of the same theory 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. Consequently, debt financing has emerged as a more popular financing option among the majority of corporations.
But debt financing has its share of drawbacks. The problem arises when leverage becomes exorbitant. A high degree of financial leverage means high interest payments, which tend to affect the company's bottom line.
Of course, this does not mean that debt financing should be a taboo in corporate financing. Nevertheless, given the current macroeconomic scenario in the United States, in favor of interest rate hikes, the market seems to be not so suitable for borrowers
Therefore, to safeguard their portfolio from losses, the real challenge for an investor is to determine whether the organization’s debt level is sustainable. This is because a debt-free corporation is rare to find. Historically, several leverage ratios have been developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
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 indicates improved solvency for a company.
With the first-quarter reporting in its last lap, investors must be targeting stocks that are exhibiting solid earnings growth. But if the stocks bear a high debt-to-equity ratio, in times of economic downturns, their so-called booming earnings picture might turn into a nightmare.
Considering this, it will be wise for investors to select companies with low leverage. These are financially more secure and immune to financial bankruptcy.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/304101/buy-these-5-low-leverage-stocks-to-strengthen-your-portfolio
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Oshkosh Corporation (OSK) : Free Stock Analysis Report
Louisiana-Pacific Corporation (LPX) : Free Stock Analysis Report
Federated National Holding Company (FNHC) : Free Stock Analysis Report
Amedisys, Inc. (AMED) : Free Stock Analysis Report
MGM Growth Properties LLC (MGP) : Free Stock Analysis Report
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