For Immediate Release
Chicago, IL – February 7, 2018 - Stocks in this week’s article ArcBest Corporation (ARCB - Free Report) , PetroChina Company Limited (PTR - Free Report) , National General Holdings Corp. (NGHC - Free Report) , Ingles Markets, Inc. (IMKTA - Free Report) and Caleres, Inc. (CAL - Free Report) .
Pick These Bargain Stocks with Exciting EV/EBITDA Ratios
The price-to-earnings (P/E) ratio, given its apparent simplicity, is preferred by many investors while uncovering bargain stocks. The idea of chasing stocks with a low P/E is ingrained in the minds of many value investors. However, even this straightforward, broadly used valuation metric suffers a few downsides.
What Makes EV/EBITDA a Better Choice?
While P/E is hands down the most widely used equity valuation ratio in the market, a relatively less-used metric called EV/EBITDA is often viewed as a better option as it offers a clearer image of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV/EBITDA determines its total value.
Also known as the enterprise multiple, EV/EBITDA 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.
EBITDA, the other constituent, gives the true 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.
Generally, the lower the EV/EBITDA ratio, the more enticing it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
EV/EBITDA also takes into account the debt on a company’s balance sheet that P/E does not. 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 assume. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.
Another major drawback of P/E is that it can’t be used to value a loss-making entity. Moreover, a firm’s earnings are subject to accounting estimates and management manipulation. On the other hand, EV/EBITDA is less open to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
Moreover, EV/EBITDA is a useful tool in assessing the value of companies that are highly leveraged and have a high degree of depreciation. The ratio also allows the comparison of companies with different debt levels.
However, EV/EBITDA is not devoid of limitations and it alone can’t conclusively determine a stock’s inherent potential and its future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
As such, a strategy only based on EV/EBITDA might not yield the desired outcome. But you can combine it with other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/291384/pick-these-5-bargain-stocks-with-exciting-evebitda-ratios
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