For Immediate Release
Chicago, IL – November 9, 2018 - Stocks in this week’s article include: ArcBest Corp. (ARCB - Free Report) , Covenant Transportation Group, Inc. (CVTI - Free Report) , Capital One Financial Corp. (COF - Free Report) , Zions Bancorp. (ZION - Free Report) and Exelon Corp. (EXC - Free Report) .
Screen of the Week of Zacks Investment Research:
Tap These 5 Value Stocks with Enticing EV/EBITDA Ratios
The price-to-earnings (P/E) ratio, due to its apparent simplicity, enjoys great popularity in the value investing world and is preferred by many investors while uncovering bargain stocks. But even this widely used valuation metric is not devoid of limitations.
What Gives EV/EBITDA the Upper Hand?
While P/E is widely considered as a useful tool to work out the fair value of a stock, a more-complicated and less-used metric called EV/EBITDA is sometimes viewed as a better alternative as it offers a clearer picture of a firm’s valuation and its earnings potential. EV/EBITDA has a more complete approach to valuation as it determines a firm’s total value. P/E, on the other hand, considers only its equity portion.
Also known as the enterprise multiple, EV/EBITDA is essentially 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. In a nutshell, it is the total value of a company.
The other component, EBITDA gives a clearer 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 appealing it is. A low EV/EBITDA ratio could signal that a stock is undervalued.
Unlike the P/E ratio, EV/EBITDA takes debt on a company’s balance sheet into account. Due to this reason, it is typically used to value potential acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV/EBITDA multiple could be seen as attractive takeover candidates.
Another key drawback of P/E is that it can’t be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less amenable to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA is also a useful tool in measuring the value of firms with a debt-laden balance sheet and have a high degree of depreciation. It also allows the comparison of companies with different debt levels.
Then again, EV/EBITDA has its limitations too. The ratio alone can’t conclusively determine a stock’s inherent potential and its future performance. It varies across industries and is usually not appropriate while comparing stocks in different industries given their diverse capital requirements.
As such, instead of solely banking on EV/EBITDA, you can combine it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen true 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/336184/tap-these-5-value-stocks-with-enticing-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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