The term "debt free stocks" has become very popular these days and for good reasons. It has become synonymous to safe investments.
Debt free stocks are considered safe because these companies are insulated against interest rate changes. These companies are considered fundamentally strong.
Their funding requirements are met by internally generated cash and issued share capital. Debt free stocks boast of being cash rich companies.
Being debt free indicates a strong possibility that the company has strong financials and higher solvency aspects.
Debt free stocks stand a better chance at surviving an economic slowdown. But debt should not be used as the only yardstick to measure the investment risk of a company.
Debt, when used optimally, can generate a lot of benefits too. First being tax shield.
Companies with higher debt have higher betas. This makes high debt companies attractive for investment.
Hence and investor should carefully analyse his risk appetite and then decide whether he should go for a debt free stock or not. For instance, if you're an investor with a moderate risk appetite you can select debt free penny stock with good profitability.
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