For Immediate Release
Chicago, IL – January 6, 2020 – Stocks in this week’s article are Navios Maritime Partners L.P. NMM, Qiwi plc QIWI, DXP Enterprises, Inc. DXPE, Legg Mason, Inc. and Schweitzer-Mauduit International, Inc. SWM.
Tap These 5 Bargain Stocks with Impressive EV/EBITDA Ratios
Price-to-earnings (P/E), given its apparent simplicity, is the most commonly used metric in the value investing world. The ratio enjoys greater popularity among valuation metrics in the investment toolkit and is preferred while uncovering stocks trading at attractive prices. But even this straightforward, easy-to-calculate equity valuation multiple is not devoid of shortcomings.
What Makes EV/EBITDA a Better Substitute?
While P/E is hands down the most widely used equity valuation ratio in the market, a relatively less used metric called EV/EBITDA is often viewed as a better option as it offers a clearer picture of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV/EBITDA determines its total value.
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.
EBITDA is a true reflection of a company’s profitability as it strips out non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Generally, the lower the EV/EBITDA ratio, the more enticing 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 key downside of P/E is that it can’t be used to value a loss-making entity. Moreover, a firm’s earnings are 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 making loss but are EBITDA-positive.
Moreover, EV/EBITDA is a useful tool in assessing the value of companies that are highly leveraged and have a high degree of depreciation. The ratio also allows the comparison of companies with different debt levels.
Then again, EV/EBITDA has its flaws. It varies across industries (a high-growth industry normally has higher multiple and vice versa) and is typically not appropriate while comparing stocks in different industries given their diverse capital expenditure requirements.
As such, instead of solely banking on EV/EBITDA, you can combine it with other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen true value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/amp/stock/news/700298/tap-these-5-bargain-stocks-with-impressive-evebitda-ratios
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