For Immediate Release
Chicago, IL – June 17, 2021 – Stocks in this week’s article are Haverty Furniture Companies, Inc. (
HVT Quick Quote HVT - Free Report) , Greif, Inc. ( GEF Quick Quote GEF - Free Report) , Tronox Holdings plc ( TROX Quick Quote TROX - Free Report) , Owens Corning ( OC Quick Quote OC - Free Report) and ArcBest Corporation ( ARCB Quick Quote ARCB - Free Report) . 5 Value Stocks with Enticing EV-to-EBITDA Ratios to Snap Up
Price-to-earnings (P/E), owing to its apparent simplicity, is 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. However, even this universally used valuation multiple is not without its shortcomings.
EV-to-EBITDA is a Better Approach, Here's Why
While P/E enjoys great popularity among value investors, a less-used and more-complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA gives the true picture of a company's valuation and earnings potential. It has a more comprehensive approach to valuation.
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 component of the multiple, gives a clearer picture 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 attractive it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued.
However, unlike P/E ratio, EV-to-EBITDA takes into account the debt on a company's balance sheet. 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.
Moreover, P/E can't be used to value a loss-making firm. A firm's earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front.
EV-to-EBITDA is also a useful yardstick 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.
But EV-to-EBITDA has its limitations too. The ratio varies across industries (a high-growth industry typically has higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries given 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/1717084/5-value-stocks-with-enticing-ev-to-ebitda-ratios-to-snap-up 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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