For Immediate Release
5 Low-Leverage Stocks That Will Boost Your Portfolio
In the complex world of investment, understanding the amount of financial leverage a company bears is crucial. With capital being one of the basic factors of production, companies - especially those facing a dearth of resources - 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 the more popular one. This is perhaps due to the cheap and easy availability of debt over equity financing.
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 also has a direct claim on the company's future profits.
Yet, debt financing has its share of drawbacks. The problem arises when leverage, referred to as the amount of debt a company bears, becomes exorbitant. A high degree of financial leverage means high interest payments, which affect the company's bottom line.
Of course, this does not mean that corporations should totally avoid debt financing. In fact, it has been an inherent instrument for corporations to grow their earnings.
Nevertheless, to be on the safe side, investors try to avoid stocks that bear large debt loads. Empirically, several leverage ratios have been constructed to measure the exact amount of debt risk a company bears in order to safeguard investors from debt traps.
Debt-to-equity ratio is one such measure, perhaps the most popular one, which has been used to evaluate a company's credit worthiness, for potential equity investments.
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