Zacks.com featured highlights include: BGS, VST, HTH, GPK and SWM

For Immediate Release

Chicago, IL – May 11, 2020 - Stocks in this week’s article are B&G Foods, Inc. BGS, Vistra Energy Corp. VST, Hilltop Holdings Inc. HTH, Graphic Packaging Holding Company GPK and Schweitzer-Mauduit International, Inc. SWM.

Pick These 5 Value Stocks with Impressive EV/EBITDA Ratios

The price-to-earnings (P/E) ratio is widely considered by investors as the yardstick for evaluating the fair market value of a stock. It is preferred by many investors to handpick stocks trading at a bargain. However, even this universally used valuation multiple is not without its limitations.

Is EV/EBITDA a Better Alternative to P/E?

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 referred to 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, the other component, is a true reflection 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.

Typically, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued and vice versa.

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.

Also, P/E can’t be used to value a loss-making firm. A company’s earnings are also 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.

However, EV/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/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 value stocks.

For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/917802/pick-these-5-value-stocks-with-impressive-evebitda-ratios?cid=CS-ZC-FT-analyst_blog%7Crw-917802

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Hilltop Holdings Inc (HTH) : Free Stock Analysis Report
 
BG Foods Inc (BGS) : Free Stock Analysis Report
 
Graphic Packaging Holding Company (GPK) : Free Stock Analysis Report
 
SchweitzerMauduit International Inc (SWM) : Free Stock Analysis Report
 
Vistra Energy Corp (VST) : Free Stock Analysis Report
 
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