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5 Value Stocks with Exciting 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 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.
The other element, EBITDA, is a true reflection of a company’s profitability as it eliminates non-cash expenses like depreciation and amortization that dilute 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 be a sign that a stock is potentially undervalued.
While P/E just considers a firm’s equity portion, EV/EBITDA determines its total value. Unlike the P/E ratio, EV/EBITDA takes debt on a company’s balance sheet into consideration. This is also the reason why EV/EBITDA is commonly used to value likely acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. 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 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 also not without its shortcomings and it alone can’t conclusively determine a stock’s inherent potential and its future performance. The multiple varies across industries (a high-growth industry typically has higher multiple) and is generally not appropriate for comparing stocks in different industries due to their diverse capital requirements.
As such, a strategy solely based on EV/EBITDA might not fetch the desired outcome. But you can combine it with the other major ratios in your stock investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to uncover value stocks.
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.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has more than doubled the market from 1988 through 2016. Its average gain has been a stellar +25% per year. See these high-potential stocks free >>.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks.com featured highlights include: Synnex, Newell Brands, First Horizon National, Qiwi and AZZ
For Immediate Release
Chicago, IL –November 15, 2019 - Stocks in this week’s article are Synnex Corp. (SNX - Free Report) , Newell Brands Inc. (NWL - Free Report) , First Horizon National Corp. (FHN - Free Report) , Qiwi plc (QIWI - Free Report) and AZZ Inc. (AZZ - Free Report) .
5 Value Stocks with Exciting 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 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.
The other element, EBITDA, is a true reflection of a company’s profitability as it eliminates non-cash expenses like depreciation and amortization that dilute 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 be a sign that a stock is potentially undervalued.
While P/E just considers a firm’s equity portion, EV/EBITDA determines its total value. Unlike the P/E ratio, EV/EBITDA takes debt on a company’s balance sheet into consideration. This is also the reason why EV/EBITDA is commonly used to value likely acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. 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 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 also not without its shortcomings and it alone can’t conclusively determine a stock’s inherent potential and its future performance. The multiple varies across industries (a high-growth industry typically has higher multiple) and is generally not appropriate for comparing stocks in different industries due to their diverse capital requirements.
As such, a strategy solely based on EV/EBITDA might not fetch the desired outcome. But you can combine it with the other major ratios in your stock investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to uncover value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/619418/5-value-stocks-with-exciting-evebitda-ratios-to-own-now
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.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has more than doubled the market from 1988 through 2016. Its average gain has been a stellar +25% per year. See these high-potential stocks free >>.
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.