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A layman can easily dupe himself if he decides to pick a stock only on the basis of numbers flashing on a real-time stock screen. A critical analysis of the company’s financial background is essential for a better investment decision.
Often investors evaluate a company’s performance by simply looking at its sales and earnings, which sometimes do not reveal the real picture. To be more precise, they do not tell whether a company’s fundamentals are sound enough to meet its financial obligations. Here, the role of coverage ratios comes into play — the higher these are the more efficient an enterprise will be in meeting its financial obligations.
Why Interest Coverage Ratio?
Interest Coverage Ratio is used to determine how effectively a company can pay the interest charges on its debt.
Debt, which is very important for financing operations for a majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. And the company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
The Interest Coverage Ratio suggests how many times the interest could be paid from earnings and also gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than one implies that the company is unable to fulfill its interest obligations, and could default in repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardships. Definitely one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.
The Winning Strategy
Apart from having an Interest Coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of “A” or “B” to your search criteria should lead to better results.
Interest Coverage Ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks that have a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are seven of the 14 stocks that qualified the screening:
Monarch Casino & Resort Inc. (MCRI - Free Report) , which owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, NV; and the Monarch Casino Black Hawk in Black Hawk, CO, has a VGM score of “B” with an expected EPS growth rate for 3–5 years is pegged at 14%. The stock currently flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
EnerSys (ENS - Free Report) , the manufacturer, marketer, and distributor of industrial batteries, has a VGM score of “A” with expected EPS growth rate of 13% for 3–5 years. The stock currently sports a Zacks Rank #1.
Francesca's Holdings Corporation , which operates a chain of retail boutiques, has a VGM score of “B” with expected EPS growth rate for 3–5 years pegged at 13.8%. The stock carries a Zacks Rank #1.
Nucor Corporation (NUE - Free Report) , which manufactures and sells steel and steel products, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is currently 12%.
Constellation Brands, Inc. (STZ - Free Report) , which produces, imports and markets beer, wine and spirits, has a Zacks Rank #2 and a VGM score of “B”. The expected EPS growth rate for 3–5 years currently stands at 18.9%.
Steel Dynamics, Inc. (STLD - Free Report) , which manufactures and sells steel products; processes and sells recycled ferrous and nonferrous metals, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years currently stands at 12%.
Packaging Corporation of America (PKG - Free Report) , which manufactures and sells containerboard and corrugated packaging products, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is currently 13%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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7 Stocks with Exciting Interest Coverage Ratio
A layman can easily dupe himself if he decides to pick a stock only on the basis of numbers flashing on a real-time stock screen. A critical analysis of the company’s financial background is essential for a better investment decision.
Often investors evaluate a company’s performance by simply looking at its sales and earnings, which sometimes do not reveal the real picture. To be more precise, they do not tell whether a company’s fundamentals are sound enough to meet its financial obligations. Here, the role of coverage ratios comes into play — the higher these are the more efficient an enterprise will be in meeting its financial obligations.
Why Interest Coverage Ratio?
Interest Coverage Ratio is used to determine how effectively a company can pay the interest charges on its debt.
Debt, which is very important for financing operations for a majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. And the company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
The Interest Coverage Ratio suggests how many times the interest could be paid from earnings and also gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than one implies that the company is unable to fulfill its interest obligations, and could default in repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardships. Definitely one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.
The Winning Strategy
Apart from having an Interest Coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of “A” or “B” to your search criteria should lead to better results.
Interest Coverage Ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks that have a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are seven of the 14 stocks that qualified the screening:
Monarch Casino & Resort Inc. (MCRI - Free Report) , which owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, NV; and the Monarch Casino Black Hawk in Black Hawk, CO, has a VGM score of “B” with an expected EPS growth rate for 3–5 years is pegged at 14%. The stock currently flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
EnerSys (ENS - Free Report) , the manufacturer, marketer, and distributor of industrial batteries, has a VGM score of “A” with expected EPS growth rate of 13% for 3–5 years. The stock currently sports a Zacks Rank #1.
Francesca's Holdings Corporation , which operates a chain of retail boutiques, has a VGM score of “B” with expected EPS growth rate for 3–5 years pegged at 13.8%. The stock carries a Zacks Rank #1.
Nucor Corporation (NUE - Free Report) , which manufactures and sells steel and steel products, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is currently 12%.
Constellation Brands, Inc. (STZ - Free Report) , which produces, imports and markets beer, wine and spirits, has a Zacks Rank #2 and a VGM score of “B”. The expected EPS growth rate for 3–5 years currently stands at 18.9%.
Steel Dynamics, Inc. (STLD - Free Report) , which manufactures and sells steel products; processes and sells recycled ferrous and nonferrous metals, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years currently stands at 12%.
Packaging Corporation of America (PKG - Free Report) , which manufactures and sells containerboard and corrugated packaging products, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is currently 13%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »