Pick These 4 Stocks With Superb Interest Coverage Ratio
Given the current economic scenario, investors should gauge the changing market dynamics and accordingly chalk out a sturdy investment strategy. The Federal Reserve's most recent action of increasing the benchmark interest rate by 25 basis points has propelled it to its highest level in 22 years. This decision, though aimed to check inflation, has stirred concerns among investors. As the benchmark interest rate climbs to a range of 5.25%-5.5%, investors may face challenges in balancing risk and return.
Well, 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. A critical analysis of the company’s financial background is always required for a better investment decision.
Well, a company 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.
Lincoln Electric Holdings, Inc. LECO, McKesson Corporation MCK, Atmos Energy Corporation ATO and O'Reilly Automotive, Inc. ORLY are four stocks with an impressive interest coverage ratio.
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.
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 four of the 16 stocks that qualified the screening:
Lincoln Electric Holdings, a leader in the engineering, design, and manufacturing of advanced arc welding solutions, automated joining, assembly and cutting systems, plasma and oxy-fuel cutting equipment, carries a Zacks Rank #2 and has a VGM Score of B. The expected EPS growth rate for three-five years is 15%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Lincoln Electric Holdings’ current financial year sales and EPS suggests growth of 13.7% and 9.4%, respectively, from the year-ago period. Lincoln Electric Holdings has a trailing four-quarter earnings surprise of 4%, on average. The stock has risen 39.8% in the past year.
McKesson, which provides healthcare services in the United States and internationally, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 10.9%.
The Zacks Consensus Estimate for McKesson’s current financial year sales and EPS suggests growth of 6.4% and 2.2%, respectively, from the year-ago period. McKesson has a trailing four-quarter earnings surprise of 4.5%, on average. The stock has rallied 18.7% in the past year.
Atmos Energy, which is engaged in the regulated natural gas distribution, and pipeline and storage businesses, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 7.5%.
The Zacks Consensus Estimate for Atmos Energy’s current financial year sales and EPS suggests growth of 18.2% and 7.9%, respectively, from the year-ago period. Atmos Energy has a trailing four-quarter earnings surprise of 4.9%, on average. The stock has risen 0.7% in the past year.
O'Reilly Automotive, which operates as a retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 13.2%.
The Zacks Consensus Estimate for O'Reilly Automotive’s current financial year sales and EPS suggests growth of 8.1% and 11.8%, respectively, from the year-ago period. ORLY has a trailing four-quarter earnings surprise of 5.5%, on average. The stock has advanced 30.7% in the past year.
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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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McKesson Corporation (MCK) : Free Stock Analysis Report
O'Reilly Automotive, Inc. (ORLY) : Free Stock Analysis Report
Lincoln Electric Holdings, Inc. (LECO) : Free Stock Analysis Report
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
