To gauge how levered a company is, the metric I like to look at is debt to total capital. Debt includes both long-term and short-term debt and is readily available on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital a desirable rate is something less than 35%, but I will consider rates up to 50% on a short-term basis.
Many investors look at a return on equity (ROE) when evaluating a company. I have never liked this metric since it ignores debt portion of invested capital. From an ROE approach a highly levered company could show a good return but not be performing well. My preferred return calculation is Free Cash Flow as a percent of Total Capital Employed.
Below are several companies that with a Debt to Total Capital less than 35%:
Texas Instruments Inc. (TXN) is one of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors.
Total Capital: 25% | Yield: 2.3%
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device, and consumer products industries.
Total Capital: 32% | Yield: 2.6%
Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations.
Total Capital: 10% | Yield: 2.8%
Erie Indemnity Co. (ERIE) is a management services company that provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States.
Total Capital: 5% | Yield: 3.0%
Mercury General Corp. (MCY), operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
Total Capital: 17% | Yield: 5.5%
Full Disclosure: Long TXN, ERIE, CINF, JNJ, MCY. See a list of all my Dividend Growth Portfolio holdings here.
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Tags: TXN, ERIE, CINF, JNJ, MCY
