U.S. Markets close in 5 hrs 13 mins

Zacks Investment Ideas feature highlights: Windstream Holdings, Emeritus and Casella Waste Systems

Zacks Equity Research

For Immediate Release
Chicago, IL- November 20, 2013 – Today, Zacks Investment Ideas feature highlights Features: Windstream Holdings ( WIN- Free Report), Emeritus Corp ( ESC- Free Report) and Casella Waste Systems ( CWST- Free Report).
3 Companies Drowning in Debt

Following the bursting of the housing bubble and subsequent financial crisis, debt has become somewhat of a 4-letter word to many Americans. And while there are many benefits to debt-free living for households, in the corporate world, debt is often desirable.

The Benefits of Debt

In order for a company to grow, it must finance that growth. This can come from retained earnings, issuing debt, or by selling new shares of stock. While many investors seem to prefer debt-free balance sheets, there are actually quite a few benefits for a company to have some debt:

  • It's cheaper than equity financing.
  • Interest payments are tax deductible, while dividends paid to shareholders are not.
  • Issuing debt does not dilute shareholder value, unlike issuing new equity.

Too Much of a Good Thing...

Of course too much debt can be crippling for a company if business turns south. The more debt financing a company uses, the greater its risk of bankruptcy.

If a company is distressed, you can bet that those interest payments will get sent out before any dividend checks. And in the event of a bankruptcy, debtholders have first claim on company assets over stockholders.

So what's the right balance of debt and equity for a company? Ideally, a company should operate around its optimal capital structure - where its weighted average cost of capital ( WACC) is minimized. But finding the right amount of debt-to-equity may be more art than science.

There are ways, however, for investors to tell if a company is carrying too much debt. And that involves looking at various financial ratios.

Liquidity vs. Solvency

Two of the best types of ratios to consider are liquidity and solvency ratios.

Liquidity is a measure of the firm's ability to meet its short-term obligations. Solvency is a measure of the firm's ability to meet its long-term obligations. It's more of a measure of the firm's long-term survival.
Two of the most common liquidity ratios are the Current Ratio [Current Assets / Current Liabilities] and the Quick Ratio [(Current Assets - Inventories) / Current Liabilities]. These will vary across industries, so it's important to compare them to their peers. But the higher the ratios the better.

The most common solvency ratios are the Interest Coverage Ratio [Operating Income / Interest Expense] and the Debt/Equity ratio. The more leveraged a company is, the lower its Interest Coverage Ratio will be and the higher its D/E ratio will be. Again, these will depend on what industry a company operates in. Capital-intensive businesses will typically carry larger amounts of debt on its balance sheet. Again, it's important to consider industry averages.

3 Companies Drowning in Debt

I ran a screen for companies with poor liquidity and solvency ratios. While this doesn't necessarily signal imminent bankruptcy, these four companies all appear to be cash-strapped and overleveraged at the moment. And that's a dangerous place to be, especially if business doesn't improve.

Here are 3 names from the list:

Windstream Holdings ( WIN- Free Report)

Current Ratio: 0.76
Quick Ratio: 0.57
Interest Coverage Ratio: 1.34
Debt/Equity: 10.25

Emeritus Corp ( ESC- Free Report)

Current Ratio: 0.71
Quick Ratio: 0.54
Interest Coverage Ratio: 0.61
Debt/Equity: 22.88

Casella Waste Systems ( CWST- Free Report)

Current Ratio: 0.76
Quick Ratio: 0.65
Interest Coverage Ratio: 1.02
Debt/Equity: 31.44

The Bottom Line

For corporations, a prudent amount of debt can be beneficial. But too much debt will increase the risks of bankruptcy and put shareholders at risk. These 3 companies appear to be in over their heads at the moment.

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros.  In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.
Get the full Report on WIN – FREE
Get the full Report on ESC – FREE
Get the full Report on CWST – FREE
Follow us on Twitter:  https://twitter.com/ZacksResearch
Join us on Facebook:  https://www.facebook.com/ZacksInvestmentResearch
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Read the analyst report on WIN

Read the analyst report on ESC

Read the analyst report on CWST

Zacks Investment Research