For Immediate Release
Chicago, IL – November 27, 2018 - Stocks in this week’s article are EnPro Industries, Inc. (NPO - Free Report) , Domtar Corp. (UFS - Free Report) , Unum Group (UNM - Free Report) , Popular, Inc. (BPOP - Free Report) and Wintrust Financial Corp. (WTFC - Free Report) .
5 Bargain Stocks Boasting Amazingly Low EV/EBITDA Ratios
The price-to-earnings (P/E) ratio is broadly considered by investors as a yardstick for assessing the fair market value of a stock. Many prefer to take the P/E route in their quest for stocks that are trading at attractive prices. However, even this widely-popular valuation metric is not without its pitfalls.
Is EV/EBITDA a Better Substitute to P/E?
Although P/E is hands down the most widely used equity valuation ratio in the market, a relatively less-used metric called EV/EBITDA is often viewed as a better option as it offers a clearer image of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV/EBITDA determines its total value.
EV/EBITDA, also known as the enterprise multiple, 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 element of the ratio, EBITDA is a true reflection of a company’s profitability as it eliminates the impact of non-cash expenses like depreciation and amortization that dilute net earnings.
Generally, the lower the EV/EBITDA ratio, the more enticing it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
However, unlike P/E ratio, EV/EBITDA considers 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.
P/E also can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV/EBITDA is difficult to manipulate 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.
However, EV/EBITDA is not devoid of limitations and it 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 spending requirements.
Hence, a strategy entirely based on EV/EBITDA might not fetch the desired results. 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 bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/339260/5-bargain-stocks-boasting-amazingly-low-evebitda-ratios
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