Since sudden variability can hit the global markets any time, it is wise to choose less risky stocks. Companies with a lower level of debt are considered safe bets. This is because highly leveraged stocks are vulnerable in times of volatility
Using financial leverage ratio, one can easily determine low-leveraged stocks. One of the most popular leverage ratios 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 lower debt-to-equity ratio implies a more financially stable business, thereby making it a more worthy investment opportunity.
With the second quarter earnings cycle set to hit the road next month, investors must be gearing up to chase stocks exhibiting solid growth. However, blindly choosing growth stocks also has its disadvantage if their debt levels are not taken into consideration. Therefore, it is needless to say that if you want to play safe, go for low-leveraged stocks.