U.S. stocks finished Friday higher as softer-than-expected labor data lowered concerns that the Federal Reserve would raise interest rates at its October meeting. Nonfarm payrolls increased just 29,000 in September. The unemployment rate also edged up to 4.2% from 4.1% in August. Investors responded positively to the weaker employment picture, viewing it as supportive of a pause in monetary tightening. The shift in expectations comes after the Federal Reserve lifted its benchmark interest-rate range to 3.75%-4.00% last month.

The Dow Jones Industrial Average rose 250.36 points, or 0.49%, to 51,176.96, while the S&P 500 advanced 0.73% to 7,722.72. The Nasdaq Composite led the major indexes with a 1.19% gain to 27,190.86, reflecting improved sentiment as near-term rate-hike expectations faded.

Against this backdrop, stocks with higher interest coverage ratios may merit investor attention. Companies better positioned to comfortably service debt can face less pressure from borrowing costs and preserve more resources for operations and growth. With monetary-policy expectations still influencing market sentiment, financially resilient businesses may offer investors a more attractive risk-reward profile. L.B. Foster Company (FSTR Quick QuoteFSTR - Free Report) , Clean Harbors, Inc. (CLH Quick QuoteCLH - Free Report) , Brinker International, Inc. (EAT Quick QuoteEAT - Free Report) and Mueller Water Products, Inc. (MWA Quick QuoteMWA - 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 interest charges on its debt.

Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its 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 how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.

An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company 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 with 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 16 stocks that qualified the screening:

L.B. Foster Company, a global technology solutions provider of products and services for the rail and infrastructure markets, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 19.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for L.B. Foster Company’s current financial-year sales and EPS implies growth of 4.1% and 134.8%, respectively, from the year-ago period. FSTR has a VGM Score of A. The stock has risen 40.9% over the past year. 

Clean Harbors, a leading provider of environmental and industrial services throughout North America, carries a Zacks Rank #2 and VGM Score of A. The company has a trailing four-quarter earnings surprise of 4%, on average. 

The Zacks Consensus Estimate for Clean Harbors’ current financial-year sales and EPS indicates growth of 7.8% and 34.3%, respectively, from the year-ago period. The stock has advanced 37.1% over the past year. 

Brinker International, one of the world's leading casual dining restaurants, carries a Zacks Rank #2 and has a VGM Score of A. EAT has a trailing four-quarter earnings surprise of 6.2%, on average. 

The Zacks Consensus Estimate for Brinker International’s current financial-year sales and EPS calls for growth of 7.9% and 22.5%, respectively, from the year-ago period. The stock has soared 59.6% 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 A. 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 16.8%, respectively, from the year-ago period. The stock has declined 15.8% over the past year.