For Immediate Release
Chicago, IL – February 20, 2020 – Stocks in this week’s article are Lincoln National Corp. LNC, Amkor Technology, Inc. AMKR, US Foods Holding Corp. USFD, Donnelley Financial Solutions, Inc. DFIN and Empire State Realty Trust, Inc. ESRT.
5 Value Picks Boasting Amazingly Low EV/EBITA Ratios
Price-to-earnings (P/E), due to its apparent simplicity, is the most commonly used metric in the value investing world. The ratio enjoys greater popularity among valuation metrics in the investment toolkit and is preferred while uncovering stocks trading at attractive prices. But even this universally used valuation multiple is not without its limitations.
What Makes EV/EBITDA a Better Substitute?
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 dubbed 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 element, gives the true picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings.
Usually, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
EV/EBITDA takes into account the debt on a company’s balance sheet that P/E ratio does not. Given 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.
P/E also can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV/EBITDA is difficult to manipulate and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA is also a useful yardstick in evaluating 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.
Then again, EV/EBITDA has its flaws. It varies across industries (a high-growth industry normally has higher multiple and vice versa) and is typically not appropriate while comparing stocks in different industries given their diverse capital expenditure requirements.
Hence, instead of solely relying on EV/EBITDA, you can club it with the other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired outcome.
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Lincoln National Corporation (LNC) : Free Stock Analysis Report
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