Zacks.com featured highlights include: Korea Electric Power, Domtar, Genesco, MarineMax and Signet Jewelers
For Immediate Release
Chicago, IL – February 8, 2021 – Stocks in this week’s article are Korea Electric Power Corporation KEP, Domtar Corporation UFS, Genesco Inc. GCO, MarineMax, Inc. HZO and Signet Jewelers Limited SIG.
5 Value Stocks with Impressive EV-to-EBITDA Ratios to Scoop Up
Value investors usually have a fixation with the price-to-earnings (P/E) strategy in their quest for stocks that are trading at attractive prices. P/E, without a shadow of doubt, is the most popular multiple used by investors to evaluate the fair market value of a stock. But even this widely-popular valuation metric is not without its pitfalls.
Is EV-to-EBITDA a Better Substitute to P/E?
While P/E is preferred by many investors to uncover value 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 its 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.
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 reduce net earnings. It is also often used as a proxy for cash flows.
Generally, 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.
Unlikely P/E ratio, EV-to-EBITDA takes into account the debt on a company's balance sheet. Due to this reason, EV-to-EBITDA is generally used to value the 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.
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-to-EBITDA is less open to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV-to-EBITDA is also a useful yardstick in assessing the value of firms that are highly leveraged and have a high degree of depreciation. It can also 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 value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1258067/5-value-stocks-with-impressive-ev-to-ebitda-ratios-to-scoop-up
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Click to get this free report Korea Electric Power Corporation (KEP) : Free Stock Analysis Report Signet Jewelers Limited (SIG) : Free Stock Analysis Report MarineMax, Inc. (HZO) : Free Stock Analysis Report Genesco Inc. (GCO) : Free Stock Analysis Report Domtar Corporation (UFS) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research
