For Immediate Release
Chicago, IL – June 28, 2018 - Stocks in this week’s article include: Big 5 Sporting Goods Corp. (BGFV - Free Report) , ArcBest Corp. (ARCB - Free Report) , Boise Cascade Company (BCC - Free Report) , Rayonier Advanced Materials Inc. (RYAM - Free Report) and UGI Corp. (UGI - Free Report) .
Screen of the Week of Zacks Investment Research:
Tap 5 Value Stocks Sporting Impressive EV/EBITDA Ratios
Price-to-earnings (P/E), due to its apparent simplicity, is preferred by many investors while picking stocks trading at attractive prices. A widely favored approach by value investors is to chase for stocks that have a low P/E ratio. However, even this simple, easy-to-calculate multiple has a few pitfalls.
Why EV/EBITDA is a Better Approach?
Although P/E is preferred by many investors while uncovering bargain stocks, another valuation metric called EV/EBITDA does a better job. The ratio is sometimes viewed as a better alternative as it offers a clearer picture of a firm’s valuation and its earnings potential.
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. Simply put, it is the total value of a firm.
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.
Typically, the lower the EV/EBITDA ratio, the more enticing it is. A low EV/EBITDA ratio could be a sign that a stock is undervalued.
However, unlike P/E ratio, EV/EBITDA takes into account the debt on a company’s balance sheet. For this reason, EV/EBITDA is usually used to value possible acquisition targets. Stocks with a low EV/EBITDA multiple could be seen as potential takeover candidates.
Another major drawback of P/E is that it can’t be used to value a loss-making firm. Moreover, a company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV/EBITDA is harder to manipulate and can also be used to value companies that have negative net earnings but are positive on the EBITDA front.
EV/EBITDA is also a useful yardstick in measuring the value of companies that are highly leveraged and have a high degree of depreciation. It also allows comparison of companies with different debt levels.
Then again, EV/EBITDA has its shortcomings too. It varies across industries (a high-growth industry normally has higher multiple and vice versa) 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 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/309334/tap-5-value-stocks-sporting-impressive-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.
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Contact: Jim Giaquinto
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