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4 Stocks That Boast an Attractive Interest Coverage Ratio
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We often judge a company based on its sales and earnings. However, these metrics may not be sufficient on their own. A stock might get a boost if these figures rise year over year or surpass estimates in a particular quarter, offering a lucrative opportunity for short-term investors to cash in. Relying solely on sales and earnings numbers may not yield the desired long-term returns. For those seeking sustainable investment growth, a deeper dive into the company’s financial health and stability is essential.
A critical analysis of a company’s financial background is a prerequisite for an informed investment decision. Coverage ratios, which assess whether a company is robust enough to meet its financial obligations, play a crucial role in this analysis. A higher ratio generally indicates a stronger financial position. This article focuses on the Interest Coverage Ratio, a key indicator used to evaluate a company's ability to pay interest on its debt, ensuring that the company is not over-leveraged and can comfortably meet its interest obligations from its operating earnings.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Brinker International, Inc. (EAT - Free Report) , Ralph Lauren Corporation (RL - Free Report) , Sterling Infrastructure, Inc. (STRL - Free Report) and Deckers Outdoor Corporation (DECK - Free Report) boast an impressive interest coverage ratio.
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 a company's profitability, and its creditworthiness depends on how effectively it meets interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
The 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. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over 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 13 stocks that qualified the screening.
Brinker International, one of the world's leading casual dining restaurant companies and home of Chili's Grill & Bar and Maggiano's Little Italy, sports a Zacks Rank #1 and has a VGM Score of B. EAT has a trailing four-quarter earnings surprise of 24.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Brinker International’s current financial year sales and earnings per share (EPS) indicates growth of 18.7% and 102.4%, respectively, from the year-ago period. EAT has surged 224.8% in the past year.
Ralph Lauren Corporation, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2 and has a VGM Score of A. RL delivered a trailing four-quarter earnings surprise of 6.5%, on average.
The Zacks Consensus Estimate for Ralph Lauren’s current financial year sales and EPS suggests growth of 5.8% and 16.5%, respectively, from the year-ago period. RL has jumped 29.1% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
Sterling Infrastructure, which is engaged in e-infrastructure, transportation and building solutions, carries a Zacks Rank #2 and has a VGM Score of A. Sterling Infrastructure delivered a trailing four-quarter earnings surprise of 16.2%, on average.
The Zacks Consensus Estimate for Sterling Infrastructure’s current financial year EPS suggests growth of 20.5% from a year ago. STRL has risen 18.7% in the past year.
Deckers, a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, currently carries a Zacks Rank #2 and has a VGM Score of A.
The Zacks Consensus Estimate for Deckers’ current financial year sales and EPS implies growth of 15.6% and 21%, respectively, from the year-ago period. DECK has a trailing four-quarter earnings surprise of 36.8%, on average. DECK has fallen 20.2% 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.
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.
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4 Stocks That Boast an Attractive Interest Coverage Ratio
We often judge a company based on its sales and earnings. However, these metrics may not be sufficient on their own. A stock might get a boost if these figures rise year over year or surpass estimates in a particular quarter, offering a lucrative opportunity for short-term investors to cash in. Relying solely on sales and earnings numbers may not yield the desired long-term returns. For those seeking sustainable investment growth, a deeper dive into the company’s financial health and stability is essential.
A critical analysis of a company’s financial background is a prerequisite for an informed investment decision. Coverage ratios, which assess whether a company is robust enough to meet its financial obligations, play a crucial role in this analysis. A higher ratio generally indicates a stronger financial position. This article focuses on the Interest Coverage Ratio, a key indicator used to evaluate a company's ability to pay interest on its debt, ensuring that the company is not over-leveraged and can comfortably meet its interest obligations from its operating earnings.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Brinker International, Inc. (EAT - Free Report) , Ralph Lauren Corporation (RL - Free Report) , Sterling Infrastructure, Inc. (STRL - Free Report) and Deckers Outdoor Corporation (DECK - Free Report) boast an impressive interest coverage ratio.
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 a company's profitability, and its creditworthiness depends on how effectively it meets interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
The 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. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over 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 13 stocks that qualified the screening.
Brinker International, one of the world's leading casual dining restaurant companies and home of Chili's Grill & Bar and Maggiano's Little Italy, sports a Zacks Rank #1 and has a VGM Score of B. EAT has a trailing four-quarter earnings surprise of 24.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Brinker International’s current financial year sales and earnings per share (EPS) indicates growth of 18.7% and 102.4%, respectively, from the year-ago period. EAT has surged 224.8% in the past year.
Ralph Lauren Corporation, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2 and has a VGM Score of A. RL delivered a trailing four-quarter earnings surprise of 6.5%, on average.
The Zacks Consensus Estimate for Ralph Lauren’s current financial year sales and EPS suggests growth of 5.8% and 16.5%, respectively, from the year-ago period. RL has jumped 29.1% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
Sterling Infrastructure, which is engaged in e-infrastructure, transportation and building solutions, carries a Zacks Rank #2 and has a VGM Score of A. Sterling Infrastructure delivered a trailing four-quarter earnings surprise of 16.2%, on average.
The Zacks Consensus Estimate for Sterling Infrastructure’s current financial year EPS suggests growth of 20.5% from a year ago. STRL has risen 18.7% in the past year.
Deckers, a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, currently carries a Zacks Rank #2 and has a VGM Score of A.
The Zacks Consensus Estimate for Deckers’ current financial year sales and EPS implies growth of 15.6% and 21%, respectively, from the year-ago period. DECK has a trailing four-quarter earnings surprise of 36.8%, on average. DECK has fallen 20.2% 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.