Avoiding
Excessive Debt
Excessive Debt
In Saturna’s 2015–2024 study of 700 US companies, this cohort—low debt or high debt—delivered higher returns with lower volatility.
What is the low-debt cohort?
The tax-deductibility of interest payments creates this “shield,” which helps reduce a company’s taxable income.
What is the tax shield?
Saturna treats this trait not just as temperament but as a “designed feature” of its investment process.
What is patience?
Once synonymous with “blue chip,” this factor now refers to firms with transparent accounting, resilient earnings, and strong balance sheets.
What is quality?
Saturna believes that this and quality are complementary, not competing, and together can enhance risk-adjusted returns.
What is ethics?
Saturna generally avoids companies whose total debt exceeds this percentage of their market capitalization.
What is 33 percent?
This measure must be lower than a company’s return on invested capital for it to earn an economic profit.
What is the weighted average cost of capital, or WACC?
While many “long-term” investors implicitly think in three- to five-year windows, Saturna is willing to underwrite horizons of this length or longer when justified.
What is seven years or more?
This return metric, when consistently above a company’s WACC, allows value to compound “like a snowball rolling down a hill.”
What is return on invested capital, or ROIC?
The idea that excluded “sin” stocks might offer higher expected returns to investors willing to hold them is known by this two-word phrase.
What is the sin premium?
This is Saturna’s core balance-sheet principle, summed up by the idea that “it’s difficult to go bankrupt absent excessive debt.”
What is avoiding excessive debt?
Despite theory favoring leverage, Saturna highlights this real-world problem that emerges when debt levels raise questions about a firm’s ability to service obligations.
What is increased financial risk, or solvency risk?
Rather than short-term volatility, Saturna identifies this as the primary risk that long horizons aim to mitigate.
What is permanent loss of capital?
Among the added factors—size, value, profitability, and investment—this one has been the best performer since the five-factor model’s publication.
What is profitability?
Saturna’s process seeks companies that combine attractive returns on capital with strong governance, environmental stewardship, and this type of social contribution.
What is positive social impact?
During the COVID-19 shock, this risk measure, defined as the worst peak-to-trough decline, was markedly smaller for low-debt companies than for high-debt companies.
What is maximum drawdown?
These two Nobel laureates argued that because interest is tax-deductible, debt financing can be cheaper than equity.
Who are Modigliani and Miller?
Saturna likens investing in financially fragile, highly leveraged companies to this dangerous act involving a steamroller.
What is picking up dollar bills in front of a steamroller?
These two researchers introduced a five-factor asset-pricing model in 2014 that explicitly incorporated profitability as a factor.
Who are Fama and French?
Companies in the worst ethical quintile were found to have total volatility roughly this much higher than those in the best ethical quintile.
What is 15 percent?