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4 Stocks with Impressive Interest Coverage Ratios to Buy Now
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Key Takeaways
Stride, Ralph Lauren, Cardinal Health and Vertiv boast strong interest coverage ratios.
Vertiv projects 42.2% sales growth and 69.5% EPS growth, with a 12% average earnings surprise.
Cardinal Health expects 12.7% EPS growth, while Ralph Lauren forecasts 14.6% growth for the fiscal year.
We often evaluate a company based on its sales and earnings performance. However, these metrics may not be sufficient on their own. A stock may receive a short-term boost when revenues and earnings increase year over year or surpass estimates in a particular quarter, creating an opportunity for investors to capitalize on the momentum. Nevertheless, relying solely on sales and earnings figures may not generate sustainable long-term returns.
A thorough assessment of a company’s financial health is, therefore, essential for making informed investment decisions. Coverage ratios, which measure a company's ability to meet its financial obligations, play a crucial role in this evaluation. Among these, the interest coverage ratio is particularly useful as it indicates how comfortably a company can meet its interest expenses from operating earnings. A higher ratio generally reflects a stronger ability to service debt, providing greater financial flexibility and a potential cushion against economic uncertainties.
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 24 stocks that qualified the screening:
Stride, one of the nation's most successful technology-based education companies, sports a Zacks Rank #1 and has a VGM Score of A. LRN has a trailing four-quarter earnings surprise of 7.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Stride’s current financial-year sales and EPS indicates growth of 2.1% and 8.5%, respectively, from the year-ago period. The stock has declined 13.7% over the past year.
Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2 and has a VGM Score of B. RL has a trailing four-quarter earnings surprise of 8.4%, on average.
The Zacks Consensus Estimate for Ralph Lauren’s current financial-year sales and EPS calls for growth of 8% and 14.7%, respectively, from the year-ago period. The stock has jumped 19.4% over the past year.
Cardinal Health, a global distributor of pharmaceuticals and medical products, offering specialty healthcare and home-health solutions, carries a Zacks Rank #2 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 13.8%, on average.
The Zacks Consensus Estimate for Cardinal Health’s current financial-year sales and EPS suggests growth of 4.7% and 13.9%, respectively, from the year-ago period. The stock has advanced 33.9% 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%, on average.
The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS calls for growth of 42.2% and 69.5%, respectively, from the year-ago period. The stock has gained 12% over the past year.
View the Zacks #1 Rank List
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4 Stocks with Impressive Interest Coverage Ratios to Buy Now
Key Takeaways
We often evaluate a company based on its sales and earnings performance. However, these metrics may not be sufficient on their own. A stock may receive a short-term boost when revenues and earnings increase year over year or surpass estimates in a particular quarter, creating an opportunity for investors to capitalize on the momentum. Nevertheless, relying solely on sales and earnings figures may not generate sustainable long-term returns.
A thorough assessment of a company’s financial health is, therefore, essential for making informed investment decisions. Coverage ratios, which measure a company's ability to meet its financial obligations, play a crucial role in this evaluation. Among these, the interest coverage ratio is particularly useful as it indicates how comfortably a company can meet its interest expenses from operating earnings. A higher ratio generally reflects a stronger ability to service debt, providing greater financial flexibility and a potential cushion against economic uncertainties.
Stride, Inc. (LRN - Free Report) , Ralph Lauren Corporation (RL - Free Report) , Cardinal Health, Inc. (CAH - Free Report) and Vertiv Holdings Co. (VRT - Free Report) stand out for their strong 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 24 stocks that qualified the screening:
Stride, one of the nation's most successful technology-based education companies, sports a Zacks Rank #1 and has a VGM Score of A. LRN has a trailing four-quarter earnings surprise of 7.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Stride’s current financial-year sales and EPS indicates growth of 2.1% and 8.5%, respectively, from the year-ago period. The stock has declined 13.7% over the past year.
Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2 and has a VGM Score of B. RL has a trailing four-quarter earnings surprise of 8.4%, on average.
The Zacks Consensus Estimate for Ralph Lauren’s current financial-year sales and EPS calls for growth of 8% and 14.7%, respectively, from the year-ago period. The stock has jumped 19.4% over the past year.
Cardinal Health, a global distributor of pharmaceuticals and medical products, offering specialty healthcare and home-health solutions, carries a Zacks Rank #2 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 13.8%, on average.
The Zacks Consensus Estimate for Cardinal Health’s current financial-year sales and EPS suggests growth of 4.7% and 13.9%, respectively, from the year-ago period. The stock has advanced 33.9% 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%, on average.
The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS calls for growth of 42.2% and 69.5%, respectively, from the year-ago period. The stock has gained 12% over the past year.