Group 1 – Low Beta/High Interest Coverage
Team 1 decided to invest in stocks with low beta and high-interest coverage ratio. The interest coverage ratio is defined as EBIT or (“Operating Profit”) with Interest Expense. It acts as a proxy for how well the firm can pay interest on its outstanding debt. During the pandemic, companies loaded up on “cheap” debt. Firms with healthy operating profits and conservative debt burdens are expected to better weather rising interest rates and the pressures of a recessionary environment. Further, as we enter a potentially volatile market, a low beta could help shield the portfolio from a downturn, and the company’s ability to adequately manage its debt payments could also provide added downside protection.