For Immediate Release
Chicago, IL – June 3, 2020 – Stocks in this week’s article are Synopsys SNPS, Tesla Inc. TSLA, Chemed Corp. CHE, Teekay Tankers Ltd. TNK and West Pharmaceutical Services WST.
Buy These 5 Low-Leverage Stocks to Invest Safely
In corporate finance, companies frequently resort to a well-known strategy called leverage, which is the use of borrowed capital in their business operations. A company can borrow either through equity or debt financing.
Empirically, it has been found that most companies prefer debt financing over equity to enhance their shareholder value. This is because debt is cheaper than equity, especially in periods of low interest rates. To this end, it is imperative to mention that the current market situation seems favorable for corporates to take debt since the COVID-19 pandemic has forced the Federal Reserve to lower interest rate to a near-zero level.
Moreover,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.
Especially, in times of crisis, no one can be fully sure of how a company will perform. On top of that those bearing large amount of debt are even more prone to bankruptcy. 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 almost over, investors may intend to choose companies that have exhibited solid earnings growth. However, blindly pursuing high earnings yielding stocks, which have a high debt-to-equity ratio, might drain all your money before you know.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/959132/buy-these-5-low-leverage-stocks-to-invest-safely
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Synopsys, Inc. (SNPS) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
West Pharmaceutical Services, Inc. (WST) : Free Stock Analysis Report
Teekay Tankers Ltd. (TNK) : Free Stock Analysis Report
Chemed Corporation (CHE) : Free Stock Analysis Report
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