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Zacks.com featured highlights include: ArcelorMittal, AZZ, United Natural Foods, Huntsman Corp and GMS

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For Immediate Release

Chicago, IL – April 29, 2021 – Stocks in this week’s article are ArcelorMittal MT, AZZ Inc. AZZ, United Natural Foods, Inc. UNFI, Huntsman Corporation HUN and GMS Inc. GMS.

Tap These 5 Bargain Stocks with Alluring EV-to-EBITDA Ratios

Value investors usually have a fixation with the price-to-earnings (P/E) strategy in their quest for stocks that are trading at a bargain. P/E, without a shadow of doubt, is the most popular multiple used by investors to evaluate the fair market value of a stock. However, even this widely-popular valuation metric is not without its pitfalls.

Is EV-to-EBITDA a Better Substitute to P/E?

Although P/E is preferred by many investors to uncover bargain stocks, another valuation metric called EV-to-EBITDA does a better job. The ratio is sometimes viewed as a superior substitute as it offers a clearer picture of a firm's valuation and earnings potential. EV-to-EBITDA has a more comprehensive approach to valuation as it determines a firm's total value. In contrast, P/E just considers the equity portion of a firm.

Also dubbed as the enterprise multiple, EV-to-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, debt and preferred stock minus cash and cash equivalents.

EBITDA, the other constituent, gives a better idea of a company's profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.

Just like P/E, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued.  

EV-to-EBITDA takes into account the debt on a company's balance sheet that P/E ratio does not. Given this reason, EV-to-EBITDA is usually used to value the possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.

Another shortcoming of P/E is that it 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-to-EBITDA is difficult to manipulate and can also be used to value companies that are making loss but are EBITDA-positive.

EV-to-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-to-EBITDA is also not without its shortcomings 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.

As such, a strategy solely based on EV-to-EBITDA might not yield the desired results. But you can club it with the other major ratios in your stock investing toolbox 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/1467310/tap-these-5-bargain-stocks-with-alluring-ev-to-ebitda-ratios

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.

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ArcelorMittal (MT) : Free Stock Analysis Report
 
AZZ Inc. (AZZ) : Free Stock Analysis Report
 
United Natural Foods, Inc. (UNFI) : Free Stock Analysis Report
 
Huntsman Corporation (HUN) : Free Stock Analysis Report
 
GMS Inc. (GMS) : Free Stock Analysis Report
 
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