We recently published a list of The 7 best debt-free stocks to buyIn this article, we will look at how Cassava Sciences Inc (NASDAQ:SAVA) compares to the other debt-free stocks.
Debt has always been the fuel for many companies in the stock market. Access to cheap capital when interest rates were at a historic low of 0.25% led most companies in the S&P 500 to bolster their balance sheets to finance various business activities, including research and development and current expenses.
However, during the Federal Reserve meeting on July 30-31, 2024, interest rates were left unchanged at 5.25% – 5.50%. Officials noted that inflation is moving toward their target, potentially allowing for future rate cuts. “The Committee believes that the risks to achieving its employment and inflation goals are becoming increasingly balanced,” the Federal Open Market Committee stated. Chairman Jerome Powell mentioned that a rate cut in September could be possible if inflation continues to ease.
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To combat inflation, the interest rate was raised 11 times between March 2022 and July 2023. Amy Hubble, senior investment advisor at Radix Financial, noted: “If they cut the interest rate by 0.25% all at once, that’s 12 cuts over several years. So it’s not going to happen quickly.”
The interest rates that businesses pay on business loans in the U.S. vary widely and depend on factors such as the type of loan, the lender, and the business’s credit score. As of 2024, average interest rates on small business term loans range from 7.85% for fixed-rate loans to 8.79% for variable-rate loans. Online business loans can have interest rates ranging from 9% to 75%, while SBA loans range from 11.50% to 16.50%. For businesses with poor credit, interest rates can be significantly higher.
After the 2008 financial crisis, however, one thing became clear: high levels of debt can weigh on a company and have serious consequences. Given the high level of interest rates – the US Federal Reserve raised interest rates to 5.25% to 5.50% last year to curb inflation – the number of companies that were unable to meet their payment obligations rose from 85 the previous year to 153.
Big companies could be in trouble as the Federal Reserve reports a staggering $13.7 trillion in corporate debt among America. S&P says the amount of corporate debt has increased 18.3% since 2020, largely as companies took advantage of the Federal Reserve’s interest rate cut at the start of the pandemic.
While most people would argue that companies with no debt are not optimizing their capital structure for growth, that’s only sometimes the case. The best debt-free stocks are companies with solid balance sheets, which is due to their ability to generate strong free cash flow. This also confirms the resilience of the company’s core business to generate significant cash flow, thus warding off the need for debt.
However, taking on debt is only acceptable if the company is profitable and follows strict protocols to avoid default. If large companies fail to meet their obligations, it can lead to bankruptcy.
In the US, concerns about a looming recession and a rise in the federal funds rate, leading to higher interest payments, have forced companies to significantly reduce their debt. As a result, some companies have maintained their position and worked within their means, relying on their free cash flow rather than taking on debt.
In this case, some companies have historically operated with little or no debt. Instead of taking on debt, they hold cash and short-term, highly liquid assets to make acquisitions and fund ongoing operations.
Therefore, the best debt-free stocks belong to companies that have successfully met their financial obligations, making them interesting investments for individuals looking for stability. A debt-free position means less financial risk and greater financial flexibility for the company.
The debt-to-equity ratio is a popular financial metric to measure a company’s financial leverage. It is calculated by dividing total liabilities by equity. Companies with a high debt-to-equity ratio compared to the industry average indicate that they rely more heavily on debt to finance their operations, which can be risky.
Generally, the best debt-to-equity ratio for any company looking to reduce its debt load is 1 to 1.5. However, the appropriate ratio depends on several factors, including the company’s growth stage and industry.
In addition to the debt-to-equity ratio, it is important to evaluate enterprise value when analyzing which debt-free stocks are the best to buy. Enterprise value is determined by considering both the current share price (market capitalization) and the cost of paying off debt (net debt, or debt minus cash).
Companies with a solid financial position tend to have a significantly lower enterprise value than their market capitalization, and therefore have more net liquidity.
Our methodology
We carefully reviewed the top 100 stocks from the Yahoo screener and selected those with zero or very little debt. We compared their enterprise value (EV) to their market capitalization. We then ranked the best debt-free stocks in ascending order of their potential upside (as of August 16).
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Cassava Sciences Inc (NASDAQ:SAVA)
MMarket capitalization as of August 16, 2024: 1.36 billion US dollars
Enterprise value: $1.24 billion
Upside potential: 617.16%
Cassava Sciences Inc (NASDAQ:SAVA) is one of the best debt-free stocks to buy to gain exposure to the healthcare sector. The company is a clinical-stage biotechnology company developing drugs for neurodegenerative diseases. Its lead product is Simufilam, a small molecule drug used to detect Alzheimer’s disease.
While Cassava Sciences Inc (NASDAQ:SAVA) was flat year-to-date, it more than doubled in value in June before experiencing a sharp decline. The stock rallied over 30% after CEO Rick Barry published a positive open letter announcing positive results from the second phase of its experimental Alzheimer’s drug Simufilam.
The major setback came as Hoau-Yan Wang, a former adviser to Cassava Sciences Inc (NASDAQ:SAVA), was charged with fraudulent applications for the experimental drug. The company has already denied any wrongdoing.
Cassava Sciences Inc. (NASDAQ:SAVA)’s debt level was approximately $14.19 million at the end of last year. The company also has an enterprise value of $935.78 million with a market capitalization of $1.06 billion.
Analysts on Wall Street rate Cassava Sciences Inc (NASDAQ:SAVA) as a “Moderate Buy” with a price target of $107, implying an upside potential of 617.16% from current levels. Insider Monkey database shows that 6 of the 920 hedge funds covered held shares in the company at the end of the first quarter of 2024.
Total SAVA 1st place on our list of the best debt-free stocks. While we recognize SAVA’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than SAVA, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
