For Immediate Release
Chicago, IL – April 23, 2019 – Stocks in this week’s article include Quanta Services, Inc. (PWR - Free Report) , Chaparral Energy, Inc. (CHAP - Free Report) , DXC Technology Company (DXC - Free Report) , TOTAL S.A. (TOT - Free Report) and Principal Financial Group, Inc. (PFG - 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 Value Stocks with Amazingly Low EV/EBITDA Ratios to Own Now
The price-to-earnings (P/E) ratio is the most commonly used tool for evaluating a firm’s value due to its simplicity. A widely favored approach by value investors is to chase for stocks that have a low P/E ratio. However, even this broadly used valuation multiple is not without its shortcomings.
Why EV/EBITDA is a Better Choice?
Although P/E enjoys great popularity among value investors, a more complicated metric called EV/EBITDA is sometimes viewed as a better alternative. EV/EBITDA gives the true picture of a company’s valuation and earning potential. Additionally, it has a more comprehensive approach to valuation.
EV/EBITDA is essentially the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). The first constituent 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 element 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.
EV/EBITDA takes into account the debt on a company’s balance sheet that P/E ratio does not. Given 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.
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 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.
But EV/EBITDA is not without its limitations. The ratio varies across industries (a high-growth industry typically has higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries given their diverse capital requirements.
Thus, instead of solely relying 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 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/382617/5-value-stocks-with-amazingly-low-evebitda-ratios-to-own-now
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