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Pick These 4 Stocks With Superb Interest Coverage Ratio

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·6 min read
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You can simply arrive at a decision to buy or sell a particular stock by looking at its sales and earnings numbers. But such a strategy does not always warrant superior returns when the market is facing myriad issues such as inflationary pressure, supply-chain challenges and the ongoing Russia-Ukraine conflict. Meanwhile, the Federal Reserve is steadily raising benchmark interest rate to tame shooting commodity prices. The Federal Reserve recently announced a 50-basis-point hike in benchmark interest rate. This followed a 25-basis-point increase announced in March.

At the current juncture, investors should gauge the changing market dynamics and accordingly chalk out their investment strategy. A critical analysis of the company’s financial background is always required for a better investment decision.

A company’s fundamentals should be sound enough to meet its financial obligations. This can be judged with coverage ratios — the higher these are the more efficient an enterprise will be in meeting its financial obligations. Here we have discussed one such ratio called the interest coverage ratio.

Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.

Why Interest Coverage Ratio?

The interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.

Debt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profits of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.

The interest coverage ratio suggests the number of times interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.

An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardship. Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.

BBQ Holdings, Inc. BBQ, AECOM ACM, Cadence Design Systems, Inc. CDNS and Chevron Corporation CVX are four stocks with an impressive interest coverage ratio.

What’s the Strategy?

Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.

Interest coverage ratio greater than X-Industry Median

Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.

5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks that have a strong EPS growth history.

Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.

Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.

Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Here are our four picks out of the 10 stocks that qualified the screening:

BBQ Holdings, a national restaurant company engaged in franchising, ownership and operation of casual and fast dining restaurants, has a Zacks Rank #1 and a VGM Score of B. The expected EPS growth rate for three-five years is 14%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for BBQ Holdings’ current financial year sales and EPS suggests growth of 40.9% and 66.2%, respectively, from the year-ago period. BBQ’s bottom line has outperformed the Zacks Consensus Estimate in the last two reported quarters. The stock has jumped 31.9% in the past year.

AECOM, the world’s trusted infrastructure consulting firm, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 19.5%.

The Zacks Consensus Estimate for AECOM’s current financial year sales and EPS suggests growth of 4.2% and 20.9%, respectively, from the year-ago period. ACM has a trailing four-quarter earnings surprise of 5.8%, on average. The stock has declined 0.8% in the past year.

Cadence Design Systems, which provides software, hardware, services, and reusable integrated circuit design blocks globally, has a Zacks Rank #2 and a VGM Score of B. The expected EPS growth rate for three-five years is 17%.

The Zacks Consensus Estimate for Cadence Design Systems’ current financial year sales and EPS suggests growth of 13.8% and 18.2%, respectively, from the year-ago period. CDNS has a trailing four-quarter earnings surprise of 10.6%, on average. The stock has rallied 15.9% in the past year.

Chevron Corporation, one of the world’s leading integrated energy companies, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 11.6%.

The Zacks Consensus Estimate for Chevron Corporation’s current financial year sales and EPS suggests growth of 32.4% and 111.2%, respectively, from the year-ago period. CVX has a trailing four-quarter earnings surprise of 6.2%, on average. The stock has advanced 49.7% in the past year.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.


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Chevron Corporation (CVX) : Free Stock Analysis Report
 
AECOM (ACM) : Free Stock Analysis Report
 
Cadence Design Systems, Inc. (CDNS) : Free Stock Analysis Report
 
BBQ Holdings, Inc. (BBQ) : Free Stock Analysis Report
 
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