Low Corporate Debt to Equity Is Usually Better

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Alter you have picked a stock with a small or reasonable number of shares in its capitalization, it pays to check the percentage of the firm's total capitalization represented by long-term debt or bonds.  Usually the lower the debt ratio, the safer and better the company.


Earnings per share of companies with high debt-to-equity ratios can be clobbered in difficult periods of high interest rates. These highly leveraged companies generally are deemed to be of poorer quality and higher risk.

A corporation that has been reducing its debt as a percent of equity over the last two or three years is well worth considering. If nothing else, the company's interest expense will be materially reduced and should result in increased earnings per share.
The presence of convertible bonds in a concern's capital structure could dilute corporate earnings if and when the bonds are converted into shares of common stock.

It should be understood that smaller capitalization stocks are less liquid, are substantially more volatile, and will tend to go up and down faster; therefore, they involve additional risk as well as greater opportunity. There are, however, definite ways of minimizing your risks, which will be discussed in Chapter 9.

Lower-priced stocks with thin (small) capitalization and no institutional sponsorship or ownership should be avoided, since they have poor liquidity and a lower-grade following.

A stock's daily trading volume is our best measure of its supply and demand. Trading volume should dry up on corrections and increase significantly on rallies. As a stock's price breaks out of a sound and proper base structure, its volume should increase at least 50% above normal. In many cases, it can increase 100% or more.

In summary, remember: stocks with a small or reasonable number of shares outstanding will, other things being equal, usually outperform older, large capitalization companies.