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Zacks.com featured highlights include: Boise Cascade, USA Truck, PetroChina Co, Berry Global Group and MetLife

·5 min read

For Immediate Release

Chicago, IL – July 2, 2021 – Stocks in this week’s article are Boise Cascade Company BCC, USA Truck, Inc. USAK, PetroChina Company Limited PTR, Berry Global Group, Inc. BERY and MetLife, Inc. MET.

Pick 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, a more complicated multiple called EV-to-EBITDA works even better and helps to allay some of the inherent flaws of the former. Often considered as a better alternative to P/E, it gives a true picture of a company's valuation and its earning potential and has a more complete approach to valuation. While P/E just considers a firm's equity portion, EV-to-EBITDA determines its total value.

EV-to-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, debt and preferred stock minus cash and cash equivalents.

The other constituent of the ratio, EBITDA gives a clearer picture of a company's profitability as it removes the impact of non-cash expenses like depreciation and amortization that dampen 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.

Unlike the P/E ratio, EV-to-EBITDA takes debt on a company's balance sheet into account. Due to this reason, it is typically used to value potential acquisition targets. The ratio shows the amount of debt the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.

Another key downside of P/E is that it can't be used to value a loss-making entity. Moreover, 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 companies that are highly leveraged and have a high degree of depreciation. It also allows the comparison of companies with different debt levels.

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.

Thus, instead of solely banking on EV-to-EBITDA, you can club it with other key ratios in your stock investment toolkit such as price-to-book (P/B), P/E and price-to-sales (P/S) to uncover bargain stocks.

For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1756436/pick-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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MetLife, Inc. (MET) : Free Stock Analysis Report
 
PetroChina Company Limited (PTR) : Free Stock Analysis Report
 
Berry Global Group, Inc. (BERY) : Free Stock Analysis Report
 
Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
 
USA Truck, Inc. (USAK) : Free Stock Analysis Report
 
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