With this factor we wanted to test if the amount of debt a company had on its balance sheet had any impact on its stock price over the following 12-months. To do this we used the net debt (long term debt minus excess cash) to market value ratio.
The results above show that the market rewards companies that take risks and punishes those that are too conservative. Companies with high cash balances and thus low debt to market value ratios (Q1) underperform those with less cash and a high amount of debt (on average).
This was most extreme with mid-sized companies where returns are linear, and highly leveraged companies outperformed companies with low amounts of leverage by over 140%. But overall the results were mixed, showing the net debt-to-market value ratio as a weak factor for achieving market outperformance.