For Immediate Release
Chicago, IL – March 1, 2019 – Stocks in this week’s article include Korea Electric Power Corp. (KEP - Free Report) , Popular, Inc. (BPOP - Free Report) , Hersha Hospitality Trust (HT - Free Report) , Tech Data Corp. (TECD - Free Report) and OFG Bancorp (OFG - Free Report) . Kevin Matras screens for companies showing their 'first' profit and explains why they are ones to watch.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
5 Bargain Stocks with Exciting EV/EBITDA Ratios to Own Now
Investors generally tend to cling to the price-to-earnings (P/E) metric while looking for bargain stocks. In addition to being a widely used tool for screening stocks, P/E is also a popular metric to work out the fair market value of a firm. But even this ubiquitously used valuation metric suffers a few drawbacks.
Why EV/EBITDA is a Better Substitute to P/E?
The popularity of P/E can be attributed to its apparent simplicity. While it is the most commonly used tool for assessing a firm’s value, a more complicated metric called EV/EBITDA does a better job. Also referred to as enterprise multiple, EV/EBITDA offers a clearer picture of a company’s valuation and its earnings potential. While P/E just considers a firm’s equity portion, EV/EBITDA determines its total value.
EV/EBITDA is essentially the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). The first element of the ratio, EV, is a firm’s market capitalization plus the market value of its debt and preferred equity minus cash.
EBITDA, the other constituent of the ratio, is a true reflection 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.
Just like P/E, the lower the EV/EBITDA ratio, the more appealing it is. A low EV/EBITDA ratio could imply that a stock is potentially undervalued and vice versa.
However, unlike P/E ratio, EV/EBITDA takes debt on a company’s balance sheet into account. Due to this reason, EV/EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.
Moreover, P/E can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is difficult to manipulate and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA also allows the comparison of companies with different debt levels and is a useful tool in measuring the value of firms that are highly leveraged and have substantial depreciation and amortization expenses.
But 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 generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
As such, instead of solely relying on EV/EBITDA, you can club it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/357216/5-bargain-stocks-with-exciting-evebitda-ratios-to-own-now
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