For Immediate Release
Chicago, IL – October 26, 2021 – Stocks in this week’s article are GMS Inc. (
GMS Quick Quote GMS - Free Report) , Matson, Inc. ( MATX Quick Quote MATX - Free Report) , AdvanSix Inc. ( ASIX Quick Quote ASIX - Free Report) , Vista Outdoor Inc. ( VSTO Quick Quote VSTO - Free Report) and DXC Technology Company ( DXC Quick Quote DXC - Free Report) . 5 Value Stocks with Exciting EV-to-EBITDA Ratios
The price-to-earnings (P/E) ratio is broadly considered by investors as the yardstick for evaluating the fair market value of a stock. It is preferred by many investors to handpick stocks trading at attractive prices. But even this universally used valuation multiple is not without its shortcomings.
What Makes EV-to-EBITDA a Better Alternative?
Although 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, its debt and preferred stock minus cash and cash equivalents. In essence, it is the entire value of a company.
The other component of the multiple, 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.
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.
Unlike the P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. Due to this reason, it is typically used to value potential acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive 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.
Moreover, EV-to-EBITDA is a useful tool in measuring 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 its shortcomings and alone cannot conclusively determine a stock’s inherent potential and future performance. The ratio 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/1815602/5-value-stocks-with-exciting-ev-to-ebitda-ratios-to-own-now 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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