For Immediate Release
Chicago, IL – December 18, 2019 - Stocks in this week’s article are Verso Corp. (VRS - Free Report) , Qiwi plc (QIWI - Free Report) , Newell Brands Inc. (NWL - Free Report) , WhiteHorse Finance, Inc. (WHF - Free Report) and Element Solutions Inc (ESI - Free Report) .
5 Value Picks Boasting Amazingly Low EV/EBITDA Ratios
The price-to-earnings (P/E) ratio is widely considered by investors as a yardstick for evaluating the fair market value of a stock. It is preferred by many investors to handpick stocks trading at attractive prices. However, even this universally used valuation multiple is not without its limitations.
Is EV/EBITDA a Better Alternative to P/E?
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, also referred to as the enterprise multiple, 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). 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 component of the ratio, gives the true picture of a company’s profitability as it eliminates 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 be a sign that a stock is potentially undervalued.
However, 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, as it shows the amount of debt the acquirer has to assume. Companies with a low EV/EBITDA multiple could be seen as attractive takeover candidates.
P/E also can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, 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 that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.
However, EV/EBITDA is also not without its limitations and alone cannot conclusively determine a stock’s inherent potential and future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
Hence, instead of solely relying on EV/EBITDA, you can club it with the other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired outcome.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/674729/5-value-picks-boasting-amazingly-low-evebitda-ratios
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