We often judge a company on the basis of its sales and earnings. These, however, may not be enough. Sometimes, a stock gets a boost if these numbers climb year over year or surpass estimates in a particular quarter, thus offering a great opportunity for an investor with a shorter horizon to cash in on. But if you are seeking long-term returns, investments backed only by sales and earnings numbers may not yield the desired results.
A critical analysis of a company’s financial background is a prerequisite for an informed investment decision. Here, coverage ratios that determine whether a company is sound enough to meet its financial obligations play a crucial role. The higher the ratio, the better. The focus of this article is on “Interest Coverage,” which is one such ratio. Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense. Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay the interest charges on its debt.
Debt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company and its creditworthiness depends on how effectively it meets interest obligations. Therefore, interest coverage ratio is one of the important criteria to factor in before making any investment decision. Interest coverage ratio suggests the number of times the interest could be paid from earnings and gauges the margin of safety a firm carries for paying interest. An interest coverage ratio lower than 1.0 implies 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. Definitely, 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. Modine Manufacturing Company ( MOD Quick Quote MOD - Free Report) , Sprouts Farmers Market, Inc. ( SFM Quick Quote SFM - Free Report) , Molina Healthcare, Inc. ( MOH Quick Quote MOH - Free Report) and McKesson Corporation ( MCK Quick Quote MCK - 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 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 15 stocks that qualified the screening: Modine Manufacturing, a diversified global leader in thermal management technology and solutions, sports a Zacks Rank #1 and has a VGM Score of A. You can see . the complete list of today’s Zacks #1 Rank stocks here The Zacks Consensus Estimate for Modine Manufacturing’s current financial year sales and EPS suggests growth of 9.2% and 47.7%, respectively, from the year-ago period. MOD has a trailing four-quarter earnings surprise of 44.7%, on average. The stock has skyrocketed 257.4% in the past year. Sprouts Farmers, which offers fresh, natural, and organic food products in the United States, carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for Sprouts Farmers’ current financial year sales and EPS suggests growth of 5.7% and 15.1%, respectively, from the year-ago period. SFM has a trailing four-quarter earnings surprise of 14.3%, on average. The stock has rallied 54.3% in the past year. Molina Healthcare, which provides managed healthcare services under the Medicaid and Medicare programs and through the state insurance marketplaces, carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for Molina Healthcare’s current financial year sales and EPS suggests growth of 3.4% and 16%, respectively, from the year-ago period. Molina Healthcare has a trailing four-quarter earnings surprise of 7.2%, on average. The stock has risen 1% in the past year. McKesson, which provides healthcare services in the United States and internationally, carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for McKesson’s current financial year sales and EPS suggests growth of 10.9% and 4.2%, respectively, from the year-ago period. McKesson has a trailing four-quarter earnings surprise of 8.1%, on average. The stock has advanced 30% 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