For Immediate Release
Chicago, IL – June 7, 2019 - Stocks in this week’s article are Israel Chemicals Ltd. ICL, Plains All American Pipeline, L.P. PAA, Legg Mason, Inc. LM, NXP Semiconductors N.V. NXPI and OFG Bancorp OFG.
5 Bargain Stocks with Impressive EV/EBITDA Ratios to Own Now
Investors tend to cling to the price-to-earnings (P/E) metric while looking for bargain stocks. In addition to being a widely used tool for screening stocks, P/E is also a popular metric to work out the fair market value of a company. However, even this universally used valuation multiple is not without its limitations.
What Gives EV/EBITDA the Upper Hand?
While P/E is hands down the most popular equity valuation ratio, there is another valuation metric called EV/EBITDA that works even better. This ratio is often viewed as a better alternative to P/E as it offers a clearer picture of a company’s valuation and its earning potential.
Also referred to 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. In a nutshell, it is the total value of a company.
EBITDA, the other component of the ratio, is a true reflection of a company’s profitability as it strips out 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/EBITDA ratio, the better it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
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.
Another drawback of P/E is that it can’t be used to value a loss-making company. Moreover, a firm’s earnings are subject to accounting estimates and management manipulation. On the other hand, EV/EBITDA is difficult to manipulate and also can be used to value entities that have negative net earnings but are positive on the EBITDA front.
EV/EBITDA also allows the comparison of companies with different debt levels and is a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation.
Then again, EV/EBITDA has its drawbacks too. It varies across industries (a high-growth industry normally has higher multiple and vice versa) and is generally not appropriate while comparing stocks in different industries given their diverse capital expenditure 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 bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/425354/5-bargain-stocks-with-impressive-evebitda-ratios-to-own-now
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Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
OFG Bancorp (OFG) : Free Stock Analysis Report
Israel Chemicals Shs (ICL) : Free Stock Analysis Report
Legg Mason, Inc. (LM) : Free Stock Analysis Report
NXP Semiconductors N.V. (NXPI) : Free Stock Analysis Report
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