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Zacks.com highlights: Acushnet Holdings, Greenbrier, Kelly Services, CVR Refining and Huntsman

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For Immediate Release

Chicago, IL – November 16, 2017 - Stocks in this week’s article include: Acushnet Holdings Corp. (GOLF - Free Report) , The Greenbrier Companies, Inc. (GBX - Free Report) , Kelly Services, Inc. (KELYA - Free Report) , CVR Refining, LP and Huntsman Corporation (HUN - Free Report) .

Screen of the Week of Zacks Investment Research:

Tap 5 Value Stocks Flaunting Alluring EV/EBITDA Ratios

The price-to-earnings (P/E) ratio, given its apparent simplicity, is the most-preferred one among valuation metrics in the investment toolkit for assessing the fair market value of a stock. The idea of chasing stocks with a low P/E is ingrained in the minds of many value investors. However, even this broadly used equity valuation multiple has a few pitfalls.

What Makes EV/EBITDA a Better Substitute?

Although P/E is the most commonly used tool for evaluating a firm’s value, a more complicated metric called EV/EBITDA does a better job. EV/EBITDA offers a clearer image of a company’s valuation and earnings potential. The ratio also has a more complete approach to valuation as it determines the total value of a firm as opposed to P/E which considers only its equity portion.

EV/EBITDA, also known as the enterprise multiple, is 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. In essence, it is the full value of a company.

EBITDA, the other element of the ratio, gives a clearer picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings. It is also often used as a proxy for cash flows.

Usually, the lower the EV/EBITDA ratio, the more appealing it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.  

EV/EBITDA takes into account the debt on a company’s balance sheet that P/E ratio ignores. Due to this reason, EV/EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to bear. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.

Another downside of P/E is that it can’t be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less amenable to manipulate and can also be used to value firms that have negative net earnings but are positive on the EBITDA front.

EV/EBITDA is also a useful tool in assessing the value of firms with high balance sheet leverage and substantial depreciation and amortization expenses. It also can be used to compare companies with different levels of debt.

But EV/EBITDA has its downsides too. It alone can’t conclusively determine a stock’s inherent potential and future performance. The ratio varies across industries and is usually not appropriate while comparing stocks in different industries given their diverse capital spending requirements.

As such, instead of solely banking on EV/EBITDA, you can combine it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen true value stocks.

And that's what we're screening for today…

For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/282890/tap-5-value-stocks-flaunting-alluring-evebitda-ratios

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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.

About Screen of the Week

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