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Zacks.com featured highlights include: Magna International, Huntsman, Anthem, Energy Transfer and CACI International

·6 min read

For Immediate Release

Chicago, IL – January 21, 2021 – Stocks in this week’s article are Magna International Inc. MGA, Huntsman Corporation HUN, Anthem, Inc. ANTM, Energy Transfer LP ET and CACI International Inc. CACI.

Pick These 5 Bargain Stocks with Exciting EV-to-EBITDA Ratios

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 picking stocks that are trading at a bargain. However, even this straightforward, broadly used valuation metric suffers a few downsides.

EV-to-EBITDA is a Better Approach, Here's Why

Although 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.

EBITDA, the other constituent, 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.

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.  

However, unlike P/E ratio, EV-to-EBITDA takes into account the debt on a company's balance sheet. For this reason, EV-to-EBITDA is usually used to value possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.

Another shortcoming of P/E is that it 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-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 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.

But EV-to-EBITDA has its downsides too. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.

Therefore, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.

For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1249019/pick-these-5-bargain-stocks-with-exciting-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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Magna International Inc. (MGA) : Free Stock Analysis Report
 
CACI International, Inc. (CACI) : Free Stock Analysis Report
 
Huntsman Corporation (HUN) : Free Stock Analysis Report
 
Energy Transfer LP (ET) : Free Stock Analysis Report
 
Anthem, Inc. (ANTM) : Free Stock Analysis Report
 
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