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
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