The price-to-earnings (P/E) multiple enjoys widespread popularity among investors seeking stocks trading at a bargain. In addition to being a widely used tool for screening stocks, P/E is a popular metric for working out the fair market value of a firm. However, even this straightforward, broadly used valuation metric has a few shortcomings.

While 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.  

Plains GP Holdings, L.P. (PAGP Quick QuotePAGP - Free Report) , DNOW Inc. (DNOW Quick QuoteDNOW - Free Report) , Gibraltar Industries, Inc. (ROCK Quick QuoteROCK - Free Report) , Miller Industries, Inc. (MLR Quick QuoteMLR - Free Report) and Sally Beauty Holdings, Inc. (SBH Quick QuoteSBH - Free Report) are some stocks with impressive EV-to-EBITDA ratios.

Is EV-to-EBITDA a Better Substitute to P/E?

EV-to-EBITDA is essentially 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. EBITDA, the other component of the multiple, 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.

Just like P/E, 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. EV-to-EBITDA takes into account the debt on a company’s balance sheet that the P/E ratio does not. For this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.

Another shortcoming of P/E is that it can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value loss-making but EBITDA-positive companies. EV-to-EBITDA is also a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.

But EV-to-EBITDA has its limitations, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate when comparing stocks in different industries, given their diverse capital requirements.

A strategy solely based on EV-to-EBITDA might not yield the desired results. However, you can club it with the other major ratios in your stock-investing toolbox, such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.

Screening Criteria

Here are the parameters to screen for value stocks:

EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-EBITDA ratio represents a cheaper valuation.

P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.

P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.

P/S less than X-Industry Median: The lower the P/S ratio, the more attractive the stock is, as investors will have to pay a smaller price for the same amount of sales generated by the company.

Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median. 

Average 20-day Volume greater than or equal to 50,000: The addition of this metric ensures that shares can be traded easily.

Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.

Zacks Rank less than or equal to 2: It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.

Value Score of less than or equal to B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Here are our five picks out of the 16 stocks that passed the screen:

Plains GP Holdings, through its subsidiaries, is involved in the transportation, storage, terminalling and marketing of crude oil and refined products. This Zacks Rank #1 stock has a Value Score of A. 

Plains GP Holdings has an expected year-over-year earnings growth rate of 27% for 2026. The Zacks Consensus Estimate for PAGP's 2026 earnings has been revised 19.7% upward over the past 60 days.

DNOW is a leading energy and industrial solutions provider with a global network of distribution and engineering locations. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

DNOW has an expected earnings growth rate of 18.5% for 2026. The consensus estimate for DNOW’s 2026 earnings has been revised 2.1% upward over the past 60 days.

Gibraltar Industries manufactures and distributes products to the industrial and building markets. This Zacks Rank #2 stock has a Value Score of A. 

Gibraltar Industries has an expected year-over-year earnings growth rate of 11% for 2026. The consensus estimate for ROCK’s 2026 earnings has moved up 1.5% over over the past 60 days.

Miller Industries is a leading manufacturer of towing and recovery equipment. This Zacks Rank #2 stock has a Value Score of A. 

Miller Industries has an expected year-over-year earnings growth rate of 139.5% for 2026. The Zacks Consensus Estimate for MLR's 2026 earnings has been revised 19.7% upward over the past 60 days.

Sally Beauty is an international specialty retailer and distributor of professional beauty supplies. This Zacks Rank #2 stock has a Value Score of A.  

Sally Beauty has an expected year-over-year earnings growth rate of 8.4% for fiscal 2026. The consensus estimate for SBH’s fiscal 2026 earnings has moved up 2.5% over over the past 60 days.