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Debt to Asset Ratio
The debt to asset ratio of a company is a strong indication of its financial health. A high debt to asset ratio indicates that a high percentage of the company’s assets are being financed by debt. Stock prices of companies that carry a high debt burden are especially sensitive to changes in the prevailing interest rate. Stocks of companies with high debt burdens may not be good risks for long term investing but may be good targets for day trading. As a company with a high debt to asset ratio may find its stock plummeting during interest rate hikes this sort of company might be good for options trading. Buying puts on a weak stock may be profitable if the stock price drops substantially. In that case traders will profit by the difference between the spot price of the stock and the strike price of the contract. A low debt to asset ratio will tend to support a higher stock price and, coupled with tangible assets, may be considered part of the margin of safety that long term investors seek in a stock.