Quality Factors

Net Debt on Market Value

With this factor, we wanted to test if the amount of debt a company had on its balance sheet impacted its stock price over the following 12 months. To do this, we used the net debt (long-term debt minus excess cash) to the market value ratio.

Net debt on market value summary

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The results above show that the market rewards companies that take risks and punishes those that are too conservative. Companies with high cash balances and, thus, low debt-to-market value ratios (Q1) underperform those with less cash and a high amount of debt (on average).

This was most extreme with mid-sized companies where returns are linear, and highly leveraged companies outperformed companies with low amounts of leverage by over 140%. But overall, the results were mixed, showing the net debt-to-market value ratio as a weak factor for achieving market outperformance.