Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

What are we looking for?

A portfolio of U.S. stocks with robust balance sheets.

The screen

Equity analysts often make references to different ratios used to determine why a stock is a good purchase or not. These ratios consist of information derived from many different sources, one of which is a company’s balance sheet.

The balance sheet is a statement outlining a company’s assets, liabilities and shareholder equity. Analysts use the information available in this statement to help make their decision surrounding whether that company is a worthwhile investment.

Story continues below advertisement

Today’s strategy is going to look for companies with strong balance sheets in the CPMS U.S. universe, currently made up of 2,100 names. This strategy ranks stocks based on return on invested capital (ROIC) – a profitability metric (high values preferred) and cash flow/debt (high values preferred).

In order to qualify, stocks must have:

  • Debt-to-equity ratio less than or equal to 1.1, to remove highly leveraged companies
  • Debt-to-total assets ratio (a measure of leverage) in the lower two-thirds of peers – today this equates to a value of 0.40 or lower
  • Cash flow-to-debt in the top two-thirds of peers – today this equates to a value of 0.27 or higher
  • Market capitalization in the top two-thirds of peers in order to remove any micro-cap stocks – today this equates to a value of $1.77-billion or higher

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from April, 2004, to December, 2019. During this process, a maximum of 15 stocks were purchased. Stocks were sold if their debt-to-equity rose above 1.3 or if their cash flow-to-debt fell in the bottom third of peers. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 13.7 per cent while the S&P 500 Total Return Index returned 9.3 per cent. Stocks that qualify for purchase into the strategy today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

U.S. stocks with strong balance sheets

RankCompanyTickerMarket Cap. ($ Millions)Jan 31st Closing PriceDividend Yield (%)Trailing 12-Month Price Change (%)Cash Flow/DebtDebt/EquityDebt/Total AssetsReturn on Invested Capital (%)
1Arena Pharma Co IncARNA2289.445.690.0-0.612.40.040.0455.0
2Arista Networks IncANET17063.0223.340.04.09.90.030.0241.0
3Arrowhead PharmaARWR4203.941.910.0196.8n/c0.000.00212.6
4Exelixis IncEXEL5226.217.200.0-27.019.60.010.0145.1
5Expeditors Intl of WashEXPD12438.873.041.45.42.30.140.0845.0
6Fortinet, Inc.FTNT19730.4115.360.050.7n/c0.000.0051.1
7Incyte CorporationINCY15739.173.070.0-9.313.00.020.0253.6
8Intuit IncINTU72983.0280.380.829.93.30.180.1165.5
9Manhattan Assoc IncMANH5461.085.460.075.23.70.220.09136.8
10National Beverage Corp.FIZZ1998.042.910.0-48.83.80.090.0649.2
11Novo-Nordisk A/SNVO143682.360.832.029.418.50.060.0287.7
12Paycom Software IncPAYC18580.2318.160.0114.68.70.070.0236.6
13Take-Two InteractiveTTWO14127.6124.640.018.19.10.050.0243.3
14Trex Company IncTREX5731.098.240.040.84.30.080.0638.0
15Veeva Systems IncVEEV21784.3146.610.034.420.30.010.0151.6

Source: Morningstar Research Inc.

* n/c occurs when the denominator is 0, i.e. when the company's have no debt.

Emily Halverson-Duncan, CFA, director, CPMS sales, at Morningstar Research Inc.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Related topics

Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies