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Hi again, Fools. I’m back to highlight three attractive businesses with very little debt. Why? Because, generally speaking, companies with low debt-to-equity ratios (below one)
- have far less earnings volatility than high-debt companies with crippling interest costs; and
- have much more flexibility to deliver strong returns over the long haul.
If you can take both liquidity risk and bankruptcy risk off the table, your chances of long-term investment success increase substantially.
This week, I’ll focus on low-debt tech plays, as they’ve been hit especially hard in recent weeks.
Kicking things off is Constellation Software (TSX:CSU), which boasts a debt-to-equity ratio of around 0.5. Shares of the software company are down 12% over the past six months versus a loss of 6% for the S&P/TSX Capped Information Technology Index.
The latter half of 2018 hasn’t been kind to the stock, but Constellation seems to be heading into 2019 with some positive operating momentum. In Q3, income jumped 21% to $145 million — $3.10 on a diluted per-share basis — as revenue grew a healthy 19%. More importantly, operating cash flow clocked in at $143 million, a 17% increase from the year-ago period.
With a forward P/E of 28, the shares aren’t exactly cheap. But given its low debt and comforting beta of 0.1, Constellation’s risk/reward trade-off is attractive.
In the dog house
Next up, we have Enghouse Systems (TSX:ENGH), which boasts a debt-to-equity ratio of essentially zero. Shares of the software company are down about 18% over the past three months, while the S&P/TSX Capped Information Technology Index is off 6% over the same time frame.
Like Constellation, concerns over slowing growth have weighed on Enghouse of late. But there’s reason to remain bullish.
In the company’s Q4 results earlier this week, net income grew 12% to $22.3 million, as revenue managed to improve 1.9%. And for the full year, Enghouse generated $24 million in operating cash flow, up nicely from $83.2 million in the prior fiscal year.
For a company with decent growth and such minuscule debt, the forward P/E of 24 seems reasonable.
Rounding out our list is Open Text (TSX:OTEX)(NASDAQ:OTEX), whose balance sheet sports a debt-to-equity ratio of 0.7. Shares of the software technologist are down about 9% over the past three months versus a loss of 6% for the S&P/TSX Capped Information Technology Index.
Open Text’s recent decline presents an attractive buying window. While revenue came in lighter than expected in Q3, EPS of $0.60 managed to top estimates. Moreover, adjusted operating margins expanded 250 basis points and operating cash flow more than doubled, suggesting that Open Text’s competitive position continues to strengthen.
“OpenText’s vision and position as market leader in Content Services, B2B Network Services, and Cloud Services allows our customers to differentiate from their competition and win in the Digital Age,” said CEO Mark J. Barrenechea.
With a cheapish forward P/E of 11 to go along with its rock-solid balance sheet, now might be a good time to buy into that bullishness.
The bottom line
There you have it, Fools: three attractive low-debt companies worth looking into.
As always, they aren’t formal recommendations. Instead, view them as a jump-off point for further research. Even low-debt stocks can be disappointing if you overpay, so due diligence is still required.
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Brian Pacampara owns no position in any of the companies mentioned. The Motley Fool owns shares of Open Text. Constellation Software and Open Text are recommendations of Stock Advisor Canada. Enghouse is a recommendation of Hidden Gems Canada.