After years of near-zero interest rates, the US Federal Reserve has positioned itself for a rate hike this year. When the Fed raises interest rates, Singapore’s SOR and SIBOR follow suit. Rising interest rates affect all our investments and investors like us need to consider the implications and select only the best companies that can deal with a rising interest rate environment.
So how we know if a company is able to survive or even thrive (as weaker competitors get weeded out) in a rising interest rate environment? For me, there are three criteria:
1. Low Debt
Companies with a strong balance sheet have relatively low liabilities and are able to service their debts better. For this, I like to use the debt-to-asset ratio:
Debt-to-Asset Ratio = Total Debt ÷ Total Assets
The debt-to-asset ratio measures the total amount of debt relative to assets. Ideally, the ratio should be 0.5 …