When investing in ASX shares, I like to choose companies which have little or no debt.
In general, companies which have low debt have less financial risk than those companies which have high debt. They are also easier to value, as there is one less variable which needs to be considered. Additionally, low debt can mean strong cash flow, as the company has not needed to borrow money to operate.
With this constraint in mind, here are 3 companies currently trading on the ASX which have no long-term debt.
ASX listed debt-free companies
Codan Limited (ASX: CDA) stated in its half-year investor presentation that it has been debt-free since 2017. Codan has also just announced higher than expected profits for FY19 and a new communications contract with the Kenyan Government worth $15 million. Positive signs for owners of CDA shares.
ARB Corporation Limited (ASX: ARB) has not taken on any long-term debt in the past 10 years. This remains the case and according to ARB’s latest market update leaves the company “well placed to react to opportunities”. With a 10-year average rate of return of 20.4%, this has been a rewarding strategy for ARB shareholders.
Altium Limited (ASX: ALU) is another company currently trading on the ASX which has no long-term debt. Altium is a software company and currently has a market cap of $4.71 billion. ALU shares have averaged an annual rate of return of more than 60% over the past 3 years. This demonstrates that companies do not have to be highly leveraged to generate high returns.
Buying shares in companies with low or no debt can lead to high investor returns. However, although I believe looking for companies with low debt is a smart first step, it should not be the sole justification for an investment. Other worthwhile considerations include return on equity, earnings growth and cash flow.
Close attention should also be paid to the price of the shares. The price needs to be justifiable based on the future prospects of the company. The aim is always to buy low and sell high. As an investor, if you can’t be sure of this over the long term then you will need to look elsewhere for opportunities.
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Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.