For Immediate Release
Chicago, IL – June 2, 2021 – Stocks in this week’s article are ArcelorMittal (
MT Quick Quote MT - Free Report) , Boise Cascade Company ( BCC Quick Quote BCC - Free Report) , United Natural Foods, Inc. ( UNFI Quick Quote UNFI - Free Report) , DXC Technology Company ( DXC Quick Quote DXC - Free Report) and Huntsman Corporation ( HUN Quick Quote HUN - Free Report) . Pick These 5 Bargain Stocks with Attractive EV-to-EBITDA Ratios
Value investors are generally fixated on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. P/E, without a shadow of doubt, is the most popular multiple used by investors to evaluate the fair market value of a stock. But even this widely popular valuation metric is not without its limitations.
What Makes EV-to-EBITDA a Better Option?
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.
The other constituent of the ratio, EBITDA, gives a better idea of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Just like P/E, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could signal 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. Due to this reason, EV-to-EBITDA is generally used to value the 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 key drawback of P/E is that it cannot be used to value a loss-making entity. A firm’s earnings are subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is less amenable to manipulation and can be used to value companies that are making a loss but have a positive EBITDA.
EV-to-EBITDA is also a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.
However, EV-to-EBITDA is also not without shortcomings and 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.
Thus, instead of solely banking on EV-to-EBITDA, you can club it with other key ratios in your stock investment toolkit such as price-to-book (P/B), P/E and price-to-sales (P/S) to uncover bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1638274/pick-these-5-bargain-stocks-with-attractive-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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