For Immediate Release
Chicago, IL – December 3, 2019 - Stocks in this week’s article are Hilltop Holdings Inc. (
HTH Quick Quote HTH - Free Report) , Mr. Cooper Group Inc. COOP, Universal Forest Products, Inc. UFPI, Newell Brands Inc. NWL and Changyou.com Ltd. CYOU. Pick These 5 Bargain Stocks with Alluring EV/EBITDA Ratios
Value investors are generally fixated on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. P/E, without a shadow of doubt, is the most popular multiple used by investors to evaluate the fair market value of a stock. But even this widely-popular valuation metric is not without its pitfalls.
EV/EBITDA is a Better Approach, Here’s Why
While P/E is preferred by many investors while uncovering value stocks, another valuation metric called EV/EBITDA does a better job. The ratio is sometimes viewed as a superior substitute as it offers a clearer picture of a firm’s valuation and its earnings potential. EV/EBITDA has a more comprehensive approach to valuation as it determines a firm’s total value. In contrast, P/E just considers the equity portion of a firm.
Also dubbed as the enterprise multiple, EV/EBITDA 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. Essentially, it is the total value of a company.
EBITDA, the other constituent, gives the true picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings.
Generally, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
However, unlike P/E ratio, EV/EBITDA takes into account 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.
Another shortcoming of P/E is that it can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. Meanwhile, EV/EBITDA is less open to manipulation and can also be used to value companies that are loss-making but EBITDA-positive.
EV/EBITDA is also a useful yardstick in assessing the value of firms that are highly leveraged and have a high degree of depreciation. It also can be used to compare companies with different levels of debt.
But EV/EBITDA has its downsides too. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
Therefore, instead of just 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/650406/pick-these-5-bargain-stocks-with-alluring-evebitda-ratios 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
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