Course 408: Cyclical Stocks
How Leveraged Is the Balance Sheet?
In this course
1 Introduction
2 How Is the Company Doing Now?
3 How Wildly Do Sales and Profits Fluctuate?
4 How Leveraged Is the Balance Sheet?
5 Does the Company Consistently Generate Positive Cash Flow?
6 How Steady Are the Company's Dividends over a Cycle?
7 Is the Firm Diversified Geographically and by Product Line?
8 Is the Long-Term Trend in Sales and Profits Upward?
9 How Has the Stock Performed?
10 How Expensive Is It?
11 How Expensive Is the Company Based on Normalized Earnings?
12 How Does the Price/Sales Ratio Compare with Historical Levels?
13 Conclusion: Get 'Em while They're Cold

Another reason some cyclicals are more volatile than others is debt. Debt adds more fixed expenses (interest payments) into a company's cost structure, and those fixed expenses must be paid in both good and bad times. As a result, the more debt a company has, the more volatile its earnings can be. United Technologies is a highly leveraged company, though leverage improved in 1999. Shareholders' equity accounted for just 31% of total assets the September quarter, and its financial leverage of 3.3 is somewhat high for an aerospace company. The company's financial leverage inched up between 1996 and 1998 but then fell again in 1999, which is a positive sign.

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