For Immediate Release
Chicago, IL – February 24, 2021 – Stocks in this week’s article are ArcelorMittal (
MT Quick Quote MT - Free Report) , Imperial Oil Ltd. ( IMO Quick Quote IMO - Free Report) , CACI International Inc. ( CACI Quick Quote CACI - Free Report) , TTM Technologies, Inc. ( TTMI Quick Quote TTMI - Free Report) and Huntsman Corporation ( HUN Quick Quote HUN - Free Report) . Tap These 5 Bargain Stocks with Alluring EV-to-EBITDA Ratios
Price-to-earnings (P/E), due to its apparent simplicity, is the most commonly used metric in the value investing world. It is preferred by many investors to handpick stocks trading at a bargain. However, even this straightforward, broadly used valuation metric has a few downsides.
What Makes EV-to-EBITDA a Better Option?
Although P/E is hands down the most widely used equity valuation ratio in the market, a relatively less used metric called EV-to-EBITDA is often viewed as a better option. This is because it offers a clearer picture of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV-to-EBITDA determines its total value.
Also referred to as the enterprise multiple, EV-to-EBITDA is 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 constituent, is a true reflection of a company’s profitability as it eliminates 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.
Typically, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio signals 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. For this reason, EV-to-EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another shortcoming of P/E is that it can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies that are making loss but are EBITDA-positive.
EV-to-EBITDA is also a useful tool in evaluating the value of firms that are highly leveraged and have a high degree of depreciation. It can also be used to compare companies with different levels of debt.
But EV-to-EBITDA has its downsides too. It varies across industries and is generally not appropriate while comparing stocks in different industries, given their diverse capital spending requirements.
Therefore, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1267789/tap-these-5-bargain-stocks-with-alluring-ev-to-ebitda-ratios 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. About Screen of the Week
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