For Immediate Release
Chicago, IL – September 11, 2020 - Stocks in this week’s article are Mr. Cooper Group Inc. (COOP - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) , Graphic Packaging Holding Co. (GPK - Free Report) , Amkor Technology, Inc. (AMKR - Free Report) and Celestica Inc. (CLS - Free Report) .
5 Stocks with Strikingly Low EV-to-EBITDA Ratios to Own Now
Price-to-earnings (P/E) is hands down the most commonly used metric in the value investing world. The ratio enjoys greater popularity among valuation metrics in the investment toolkit and is preferred while uncovering stocks trading at attractive prices. A widely favored approach by value investors is to chase stocks with a low P/E ratio. But even this equity valuation multiple is not devoid of shortcomings.
Is EV-to-EBITDA a Better Alternative to P/E?
Although P/E is by far the most-popular valuation metric, the more complicated EV-to-EBITDA does a better job in working out the fair market value of a firm. Often viewed as a better substitute to P/E, this ratio offers a clearer picture of a company’s valuation and its earnings potential.
EV-to-EBITDA is essentially the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company’s market capitalization, debt and preferred stock minus cash and cash equivalents.
EBITDA, the other element, is a true reflection of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings. It is also often used as a proxy for cash flows.
Usually, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could be a sign that a stock is potentially undervalued.
EV-to-EBITDA takes into account the debt on a company’s balance sheet that P/E ratio does not. Given this reason, EV-to-EBITDA is usually used to value possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.
Also, P/E can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. Meanwhile, EV-to-EBITDA is less open to manipulation and can also be used to value companies that are making a loss but are EBITDA-positive.
Moreover, EV-to-EBITDA is a useful tool in assessing the value of companies that are highly leveraged and have a high degree of depreciation. The ratio also allows the comparison of companies with different debt levels.
However, EV-to-EBITDA is also not without shortcomings and it alone can’t conclusively determine a stock’s inherent potential and future performance. The multiple varies across industries and is generally not appropriate for comparing stocks in different industries due to their diverse capital requirements.
As such, a strategy solely based on EV-to-EBITDA might not yield the desired results. But you can club it with the other major ratios in your stock-investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/1056292/5-stocks-with-strikingly-low-evtoebitda-ratios-to-own-now
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