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%:
Medtronic PLC (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
Debt Total Capital: 32.9% | Yield: 2.4%
T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with June 30 AUM of $776.6 billion.
Debt Total Capital: 1.7% | Yield: 3.4%
Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc., which provides commercial banking services in Kentucky, Tennessee and West Virginia; and a trust company.
Debt Total Capital: 9.4% | Yield: 3.7%
Full Disclosure: Long TROW, CTBI,
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Tags: MDT, TROW, CTBI,
