An ill-informed investor can lose 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 the company’s financial background is always required for a better investment decision, especially at a time when the stock market is juggling myriad issues, such as soaring inflation, supply chain bottlenecks and a hawkish monetary policy.
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?
The 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 the 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 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. H&R Block, Inc. ( HRB Quick Quote HRB - Free Report) , BorgWarner Inc. ( BWA Quick Quote BWA - Free Report) , Coterra Energy Inc. ( CTRA Quick Quote CTRA - Free Report) and ExlService Holdings, Inc. ( EXLS Quick Quote EXLS - Free Report) boast an impressive interest coverage ratio. 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 with 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 13 stocks that qualified the screening: H&R Block, which offers assisted income tax return preparation and related services, carries a Zacks Rank #2 and has a VGM Score of B. Its expected EPS growth rate for three-five years is 12.5%. You can see . the complete list of today’s Zacks #1 Rank stocks here The Zacks Consensus Estimate for H&R Block's current financial year sales and EPS suggests growth of 2.6% and 7.7%, respectively, from the year-ago period. HRB has a trailing four-quarter earnings surprise of 19.2%, on average. The stock has rallied 79.6% in the past year. BorgWarner, which provides solutions for combustion, hybrid, and electric vehicles globally, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 26.8%. The Zacks Consensus Estimate for BorgWarner’s current financial year sales and EPS suggests growth of 6.3% and 2.9%, respectively, from the year-ago period. BWA has a trailing four-quarter earnings surprise of 29.5%, on average. The stock has declined 13.6% in the past year. Coterra Energy, a premier exploration and production company, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 55%. The Zacks Consensus Estimate for Coterra Energy’s current financial year sales and EPS suggests growth of 146.8% and 123.6%, respectively, from the year-ago period. CTRA has a trailing four-quarter earnings surprise of 4.4%, on average. The stock has risen 58.6% in the past year. ExlService Holdings, a global analytics and digital solutions company, carries a Zacks Rank #2 and has a VGM Score of B. The expected EPS growth rate for three-five years is 13%. The Zacks Consensus Estimate for ExlService Holdings’ current financial year sales and EPS suggests growth of 21.9% and 17.8%, respectively, from the year-ago period. EXLS has a trailing four-quarter earnings surprise of 12.3%, on average. The stock has appreciated 40.4% 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. 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.