Debt-to-Equity Ratio Filter: Controlling Assignment Risk

What is the Debt-to-Equity ratio?

D/E = Total Debt ÷ Shareholders' Equity

A D/E of 1.0 means the company has $1 of debt for every $1 of equity. A D/E of 3.0 means three times more debt than equity — a highly leveraged balance sheet.

Why debt matters for wheel traders

When you sell a CSP and get assigned, you own the stock. If the company is highly leveraged:

• A recession or rate rise can rapidly deteriorate the company's ability to service debt.
• High interest costs eat into earnings and cash flow.
• Debt covenants can restrict dividends and buybacks — removing the shareholder benefits you were counting on.

High-debt companies have more volatile share prices — which increases your options premium initially but amplifies the downside if things go wrong.

Recommended maximums by sector

Using the filter

1. Open the Stock Screener.
2. Find D/E in the Valuation section.
3. Set maximum to 1.5 for a balanced screen across most sectors.
4. Combine with ROE minimum (high ROE + low D/E = genuinely efficient, not just leveraged).

Debt isn't always bad

Some debt is rational — it's often cheaper than equity and can enhance returns. The question is whether the business generates enough cash flow to service the debt comfortably. Cross-reference D/E with Net Margin and 5Y FCF growth to gauge coverage capacity.

Common mistake: applying a single D/E threshold universally

Capital-intensive businesses (utilities, real estate, infrastructure) routinely carry D/E of 2–4 and this is entirely normal. When screening for these sectors, raise your D/E ceiling accordingly and focus more on cash flow coverage (P/FCF) instead.