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Pick These 4 Stocks With Impressive Interest Coverage Ratio

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Bouts of volatility are clearly visible in the stock market, mainly stemming from conflicting headlines on inflation, supply chain issues and escalating tensions between Russia and Ukraine. Also, as the Federal Reserve prepares for a rate hike as soon as March, the action might cause some pullbacks in the market. At the current juncture, investors should gauge the changing market dynamics and accordingly chalk out their investment strategy.

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 VGM Score of A or B to your search criteria should lead to better results.

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 18 stocks that qualified the screening:

Boot Barn Holdings, Inc. (BOOT - Free Report) , leading lifestyle retailer of western and work-related footwear, apparel and accessories, has a Zacks Rank #1 and a VGM Score of A. The expected EPS growth rate for three-five years is 20%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn Holdings’ current financial year sales and EPS suggests growth of 62.6% and 220.8%, respectively, from the year-ago period. BOOT has a trailing four-quarter earnings surprise of 47.1%, on average. The stock has jumped 32.6% in the past year.

CBRE Group, Inc. (CBRE - Free Report) , a commercial real estate services and investment company, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 11%.

The Zacks Consensus Estimate for CBRE Group’s current financial year sales and EPS suggests growth of 14.7% and 63%, respectively, from the year-ago period. CBRE has a trailing four-quarter earnings surprise of 41%, on average. The stock has increased 28% in the past year.

ExlService Holdings, Inc. (EXLS - Free Report) , a global analytics and digital solutions company, has a Zacks Rank #2 and a VGM Score of B. The expected EPS growth rate for three-five years is 14.6%.

The Zacks Consensus Estimate for ExlService Holdings’ current financial year sales and EPS suggests growth of 16.6% and 36%, respectively, from the year-ago period. EXLS has a trailing four-quarter earnings surprise of 15.3%, on average. The stock has appreciated 41.3% in the past year.
    
Intuit Inc. (INTU - Free Report) , the global technology platform that makes TurboTax, QuickBooks, Mint, Credit Karma and Mailchimp, has a Zacks Rank #2 and a VGM Score of B. The expected EPS growth rate for three-five years is 15.7%.

The Zacks Consensus Estimate for Intuit’s current financial year sales and EPS suggests growth of 27.3% and 19.9%, respectively, from the year-ago period. INTU has a trailing four-quarter earnings surprise of 20.9%, on average. The stock has advanced 20.6% in the past year.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.

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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.