An ill-informed investor can end up losing cash if he wagers on a stock only on the basis of the numbers flashing on a real-time stock screen. A critical analysis of a company’s financial background is essential for wise investment decisions.
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 coverage ratio comes into play — the higher the metric, 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 interest charges on its debt.
Debt, which is crucial to financing operations for majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. 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. Interest Coverage Ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest. An interest coverage ratio lower than one suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardships. 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
of A or B to your search criteria should lead to better results. VGM Score 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 four of the 12 stocks that qualified the screening: KB Home ( KBH Quick Quote KBH - Free Report) , which operates as a homebuilding company in the United States, has a Zacks Rank #1 and a VGM Score of A. The expected EPS growth rate for three-five years currently stands at 22.6%. You can see . the complete list of today’s Zacks #1 Rank stocks here Boot Barn Holdings, Inc. ( BOOT Quick Quote BOOT - Free Report) , one of the leading lifestyle retailers of western and work-related footwear, apparel and accessories, has a VGM Score of A. This Zacks Rank #2 company has an expected EPS growth rate of 20% for three-five years. Crocs, Inc. ( CROX Quick Quote CROX - Free Report) , which designs, develops, manufactures, markets, and distributes casual lifestyle footwear and accessories, has a VGM Score of A. This Zacks Rank #2 company has an expected EPS growth rate of 15% for three-five years. Deckers Outdoor Corporation ( DECK Quick Quote DECK - Free Report) , which designs, markets and distributes footwear, apparel and accessories, has a VGM Score of B. This Zacks Rank #2 company has an expected EPS growth rate of 21.5% for three-five years. 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