Wall Street ended lower Tuesday as investors grew cautious ahead of the Federal Reserve’s interest-rate announcement, while a sharp rise in Treasury yields added pressure on risk assets. Market anxiety was further amplified by escalating hostilities in the Middle East, including attacks targeting Saudi Arabia’s energy infrastructure. The resulting increase in energy prices supported the energy sector but also heightened the risk that constrained crude supplies could sustain inflationary pressures and weigh on consumer spending.

Against this backdrop, the Dow Jones Industrial Average declined 328.09 points, or 0.63%, to 52,093.11. The S&P 500 slipped 0.45% to 7,585.73, while the Nasdaq Composite posted a steeper 0.78% decline to close at 25,981.57.

With Treasury yields elevated and borrowing costs remaining under pressure, businesses with greater earnings coverage of interest expenses are generally better positioned to absorb higher financing costs without materially straining cash flows. A healthy interest coverage ratio can also indicate greater financial flexibility, lower debt-servicing risk and a stronger capacity to navigate periods of tighter monetary conditions and economic uncertainty.

DiamondRock Hospitality Company (DRH Quick QuoteDRH - Free Report) , Vertiv Holdings Co (VRT Quick QuoteVRT - Free Report) , Mueller Water Products, Inc. (MWA Quick QuoteMWA - Free Report) and Phibro Animal Health Corporation (PAHC Quick QuotePAHC - Free Report) have impressive interest coverage ratios.

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. 

Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense. 

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 17 stocks that qualified the screening:

DiamondRock Hospitality, a self-advised real estate investment trust that owns a leading portfolio of geographically diversified hotels, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for DiamondRock Hospitality’s current financial-year sales and EPS implies growth of 2.9% and 14.8%, respectively, from the year-ago period. DRH has a VGM Score of B. The stock has risen 52.4% over the past year. 

Vertiv Holdings, a global leader in critical digital infrastructure, carries a Zacks Rank #2 and has a VGM Score of A. VRT has a trailing four-quarter earnings surprise of 12.6%, on average. 

The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS calls for growth of 36.9% and 59.3%, respectively, from the year-ago period. The stock has soared 71.4% over the past year. 

Mueller Water Products, a leading manufacturer and marketer of products and solutions used in the transmission, distribution and measurement of water, carries a Zacks Rank #2 and has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 13.2%, on average. 

The Zacks Consensus Estimate for Mueller Water Products’ current financial-year sales and EPS suggests growth of 3.5% and 20.6%, respectively, from the year-ago period. The stock has fallen 9.9% over the past year.

Phibro Animal Health, a leading global diversified animal health and mineral nutrition company, carries a Zacks Rank #2 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 18.4%, on average. 

The Zacks Consensus Estimate for Phibro Animal Health's current financial-year sales and EPS suggests growth of 3.8% and 6.5%, respectively, from the year-ago period. The stock has declined 9.2% over the past year.