For Immediate Release
Chicago, IL – August 11, 2020 – Stocks in this week’s article are Boise Cascade Company BCC, Comfort Systems USA, Inc. FIX, Celestica Inc. CLS, Amkor Technology, Inc. AMKR and Graphic Packaging Holding Company GPK.
5 Stocks with Amazingly Low EV-to-EBITDA Ratios to Scoop Up
The price-to-earnings (P/E) ratio is broadly considered by investors as the yardstick for evaluating the fair market value of a stock. It is preferred by many investors while handpicking stocks that are trading at attractive prices. However, even this straightforward, broadly used valuation metric suffers a few downsides.
Why EV-to-EBITDA Is a Better Alternative
While the widespread use of P/E stems from its simplicity, a more-complicated metric called EV-to-EBITDA is sometimes viewed as a better approach as it offers a clearer picture of a company’s valuation and earnings potential. EV-to-EBITDA determines the total value of a firm while P/E considers only its equity portion.
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.
The other component of the ratio, EBITDA, gives a better idea 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.
Just like P/E, the lower the EV-to-EBITDA ratio, the more attractive 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. Due to this reason, EV-to-EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another key drawback of P/E is that it cannot be used to value a loss-making entity. A firm’s earnings are subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is less amenable to manipulation and can be used to value companies that are making a 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 has its limitations too. It varies across industries and is 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 value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1038556/5-stocks-with-amazingly-low-ev-to-ebitda-ratios-to-scoop-up
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Comfort Systems USA, Inc. (FIX) : Free Stock Analysis Report
Amkor Technology, Inc. (AMKR) : Free Stock Analysis Report
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Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
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