What is the Zero Debt smallcase all about?

Zero-debt companies do not have any outstanding debt obligations. These companies finance their operations or expansion plans via cash reserves, retained earnings or equity financing. Due to their zero debt position, the operation of such companies is significant in several different ways : 

• Since zero debt companies are not burdened by interest payments or principal repayments they are generally more financially stable. 
• Companies that do not have the pressure of servicing debts generally have greater flexibility in their financial decision-making and can focus on long-term strategic planning.
• Research (Byon et al in Why do some firms become debt free?) also suggests that equity market conditions are very favourable for debt-free firms and such firms experience good stock market performance. 
• Economic downturns are usually accompanied by rising interest rates caused by adverse credit market conditions. Zero-debt companies are not exposed to such risks. Research by Tarek Zaher et al in “Does it Pay to Invest in Debt-Free Firms During Recessions?” indicates that during the recession, investments in portfolios of large-cap debt-free firms tend to generate higher returns than investments in their leveraged peers. It can be inferred from the research that investors tend to reward firms that resist the urge to borrow heavily and operate with a debt-free balance sheet during recessions and to penalize firms that have high levels of debt.

Zero Debt smallcase

The Zero Debt smallcase screens for companies with zero long-term debt and consistently growing their earnings per share (EPS) over the long term. EPS growth indicates how well a company is generating profits over time. A consistent and positive EPS growth suggests that the company is effectively managing its operations and increasing its bottom line. In addition, EPS growth directly impacts shareholder value. As earnings increase, the company becomes more valuable, and this can potentially lead to a rise in the stock price, benefiting existing shareholders.

The shortlisted stocks are sorted on the basis of their return on equity (ROE) and only stocks that have earned high ROE are added to the final basket. ROE measures the efficiency of management in generating profits relative to shareholders’ equity. A higher ROE generally indicates efficient use of shareholders’ funds, sound business strategies and effective capital allocation.

You can explore the Zero Debt smallcase to invest in efficiently managed debt-free companies that have been growing rapidly.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. The content in this article is for informational and educational purposes only and should not be construed as professional financial advice nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products. Users must make their own investment decisions based on their specific investment objective and financial position and use such independent advisors as they believe necessary.Disclosures: bit.ly/sc-wc