The U.S. stock market seems to be on a high right now on account of the dynamic market conditions that have been prevailing across the globe for the past few days. Two factors – reduced risk of euro dissolution in the wake of market-preferred French election results and hopes for a corporate tax cut by Trump – are driving the equity market rally.

The global equity markets picked up pace at the beginning of the week as the first round of the French presidential election went in favor of Emmanuel Macron. On the other hand, U.S. President Trump’s promise to cut corporate tax by 20% and to impose a 10% tax on foreign earnings in repatriation, boosted market sentiments.

On top of that, Federal Reserve chairperson, Janet Yellen’s consistent claim that the U.S. economy is growing “pretty healthy”, leads to more optimism. All these factors set the stage for investment in U.S. stocks.

However, analysts remain concerned about low productivity growth and sluggish consumer spending. Besides, following Trump’s failure to repeal Obamacare, a few are skeptical about the implementation of the corporate tax cut.

Therefore, it is better to be safe than sorry and invest in less risky stocks. Considering the fact that uncertainty can hit equity market any time, it is better to avoid highly leveraged stocks as they are the most vulnerable ones at times of volatility.  

So investors must look for stocks that are less leveraged, as only a few fortunate ones can totally escape from debt financing. Herein comes the use of financial leverage ratio, which helps one to identify highly leveraged stocks. One of the most popular leverage ratios is the debt-to-equity ratio.

Analyzing Debt-to-Equity

Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity

This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A lower debt-to-equity ratio implies a more financially stable business, thereby making it a more worthy investment opportunity.