For Immediate Release
Chicago, IL – February 7, 2018 - Stocks in this week’s article ArcBest Corporation ARCB, PetroChina Company Limited PTR, National General Holdings Corp. NGHC, Ingles Markets, Inc. IMKTA and Caleres, Inc. CAL.
Pick These Bargain Stocks with Exciting EV/EBITDA Ratios
The price-to-earnings (P/E) ratio, given its apparent simplicity, is preferred by many investors while uncovering bargain stocks. The idea of chasing stocks with a low P/E is ingrained in the minds of many value investors. However, even this straightforward, broadly used valuation metric suffers a few downsides.
What Makes EV/EBITDA a Better Choice?
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 image 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 known as the enterprise multiple, EV/EBITDA is 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, 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. 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.
EV/EBITDA also takes into account the debt on a company’s balance sheet that P/E does not. Due to this reason, EV/EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.
Another major drawback 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. On the other hand, 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.
However, EV/EBITDA is not devoid of limitations and it alone can’t conclusively determine a stock’s inherent potential and its future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
As such, a strategy only based on EV/EBITDA might not yield the desired outcome. But 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 bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/291384/pick-these-5-bargain-stocks-with-exciting-evebitda-ratios
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ArcBest Corporation (ARCB) : Free Stock Analysis Report
National General Holdings Corp (NGHC) : Free Stock Analysis Report
PetroChina Company Limited (PTR) : Free Stock Analysis Report
Ingles Markets, Incorporated (IMKTA) : Free Stock Analysis Report
Caleres, Inc. (CAL) : Free Stock Analysis Report
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