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What are we looking for?

Large-cap companies trading in the United States with minimal debt, positive free cash flow and stable net profit margins.

The screen

The summer months of trading have been anything but dull thus far. Event risk such as Brexit has stirred up financial markets as volatility has increased across all asset classes. In the background of all this noise, it's worth pointing out that, according to the U.S. Bureau of Economic Analysis, non-financial corporate debt outstanding is sitting at $8.4-trillion (U.S.) as of the first quarter of 2016. To put this in context, this is roughly 45 per cent of GDP in the United States – a level we haven't seen since the second quarter of 2009.

This number is important because it adds risk to companies with elevated debt levels who cannot service their debt. These companies will need to reduce hiring or potentially cut jobs to pay interest on this debt. In turn, from a macroeconomic standpoint, this event could lead to a slowdown in job growth, which is detrimental to economic growth.

Our screen looks for companies that should avoid having to face this dynamic because of a healthy balance sheet and consistent profitability. We begin by identifying companies in the United States with a market capitalization above $10-billion and positive free cash flow over the past 12 months.

Next, we're looking for companies with long-term-debt-to-equity ratios – a measure of financial leverage – of less than 75 per cent and a negative net-debt position. (Net debt is calculated as a company's debt minus cash and cash equivalents; therefore, a company with negative net debt has enough cash on the balance sheet to cover their debt.)

Finally, we're adding a profitability filter by search for companies that had a net profit margin of at least 20 per cent for each of the past five fiscal years.

More about Thomson Reuters

Thomson Reuters delivers trusted news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.

What did we find?

Using Thomson Reuters Eikon, our screen identified 11 companies meeting the criteria above. Sorting by market capitalization, Alphabet tops the list. Although the stock price is down roughly 8 per cent year to date, Alphabet's empire continues to grow through innovation. According to Google Inc. CEO Sundar Pichai, the Alphabet subsidiary's mission is to organize the world's information and make it accessible and useful. With a solid financial position, the company can continue to invest in its products to make them more useful and intelligent.

This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.

Patrick Gattuso, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.

U.S. large caps with minimal debt, stable profit margins

CompanyTickerMarket Cap. (US$ Bil.)LT Debt to Ttl. Equity LTMFree Cash Flow LTM (US$ Bil.)Net Debt LTM (US$ Bil.)Net Profit Margin (Last FY)Net Profit Margin (FY-1)Net Profit Margin (FY-2)Net Profit Margin (FY-3)Net Profit Margin (FY-4)Price Chg. YTD
Alphabet Inc.GOOGL-Q483.81.7%12.9-67.521.0%20.7%23.7%21.9%25.6%-8.7%
MasterCard Inc.MA-N96.340.6%3.0-4.339.6%38.3%37.4%37.4%28.6%-8.7%
Qualcomm Inc.QCOM-Q77.932.0%2.5-6.720.7%28.4%27.7%27.9%30.8%6.0%
BlackRock Inc.BLK-N55.817.5%1.8-0.129.4%29.7%28.7%26.3%25.5%0.2%
Franklin Resources Inc.BEN-N19.318.2%1.4-5.425.3%27.9%26.8%27.0%26.9%-10.2%
T. Rowe Price Group Inc.TROW-Q18.00.0%0.1-1.028.6%30.5%29.8%29.0%28.0%1.2%
Analog Devices Inc.ADI-Q17.422.4%0.2-2.120.8%22.4%25.5%24.1%28.7%2.4%
TD Ameritrade HoldingAMTD-Q14.836.5%0.6-0.325.0%25.2%24.3%22.1%23.0%-19.4%
Xilinx Inc.XLNX-Q11.738.0%0.3-1.824.9%27.2%26.5%22.5%23.6%-1.7%
Waters Corp.WAT-N11.573.5%0.5-0.722.8%21.3%23.6%24.6%22.5%5.6%
Linear Technology Corp.LLTC-Q11.10.0%0.2-1.335.3%33.1%31.7%31.4%39.2%8.8%

Source: Thomson Reuters Eikon

Data as of July 4.