A readily available metric to differentiate between profit-generating and profit-burning companies is the return on equity (“ROE”). ROE denotes the amount of income generated before non-recurring items as a percentage of shareholders' equity. In other words, ROE measures the amount of profit a company produces with its shareholders' money. Quite naturally, a company with a higher ROE is a safer bet compared with its peers.
If a stock bears greater liquidity and lower debt, along with a comparatively higher ROE, its appeal increases manifold. During uncertain times, a capacity to generate higher profit out of shareholders' money provides the necessary protection to a stock. Further, a healthy liquidity position with low debt improves the stock's ability to withstand the pressure exerted by an interest-rate hike.
In the current market condition, picking stocks with these characteristics could be a good long-term strategy.
5 Stocks with High Returns & Low Debt
We have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy), current ROE (TTM) more than 15%, debt-to-total capital below 10% and debt-to-equity ratio below one. These stocks also have a Growth Style Score ‘A' or ‘B.' (Click here to know about our style score system).
American Woodmark Corp. (AMWD – Snapshot Report)
This Winchester, VA-based company manufactures and distributes kitchen cabinets and vanities for remodeling and construction of houses.
Zacks Rank #1
Growth Score: B
Current ROE (ttm): 17.88%
Debt/Total Capital: 7.86569
Debt/Equity: 0.09
Cyberonics Inc. (CYBX – Analyst Report)
Based in Houston, TX, Cyberonics Inc. is a medical technology company with core expertise in neuromodulation. The firm provides Vagus Nerve Stimulation (“VNS”) therapy for treatment of refractory epilepsy and treatment-resistant depression (“TRD”).
Zacks Rank #2
Growth Score: A
Current ROE (ttm): 24.7%
Debt/Total Capital: 2.89479
Debt/Equity: 0.03
Hormel Foods Corporation (HRL – Analyst Report)
Austin, MN-based Hormel Foods is a leading manufacturer and marketer of various meat and food products in the u.s. and international markets.
Zacks Rank #2
Growth Score: B
Current ROE (ttm): 18.28%
Debt/Total Capital: 5.9723
Debt/Equity: 0.06
Mentor Graphics Corp. (MENT – Snapshot Report)
Wilsonville, OR-based Mentor Graphics designs, manufactures, markets and supports electronic design automation (“EDA”) software for the integrated circuit and systems design markets.
Zacks Rank #2
Growth Score: B
Current ROE (ttm): 17.16%
Debt/Total Capital: 2.5924
Debt/Equity: 0.02
NIKE, Inc. (NKE – Analyst Report)
Headquartered in Beaverton, OR, NIKE is engaged in designing, developing and marketing of footwear, apparel, and equipment & accessory products for men, women and children worldwide.
Zacks Rank #2
Growth Score: B
Current ROE (ttm): 28.11%
Debt/Total Capital: 7.722
Debt/Equity: 0.08
Bottom Line
Promise of high return on investors' money sets a stock apart from its peers. On top of this, features like high liquidity and low debts make these stocks even more reliable. At the same time, robust growth prospects should further boost investors' confidence in these stocks.
