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Zacks.com featured highlights include: MGM Growth Properties, AZZ, Donnelley Financial Solutions, Hollysys Automation Technologies and Global Net Lease

Zacks Equity Research
·5 min read

For Immediate Release

Chicago, IL – April 24, 2020 – Stocks in this week’s article are MGM Growth Properties LLC MGP, AZZ Inc. AZZ, Donnelley Financial Solutions, Inc. DFIN, Hollysys Automation Technologies Ltd. HOLI and Global Net Lease, Inc. GNL.

5 Bargain Stocks Boasting Strikingly Low EV/EBITDA Ratios

Investors generally have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. However, even this widely popular valuation metric is not without its pitfalls.

EV/EBITDA is a Better Approach, Here’s Why

Although P/E enjoys great popularity among value investors, a less-used and more-complicated metric called EV/EBITDA is sometimes viewed as a better alternative. EV/EBITDA, also referred to as the enterprise multiple, gives the true picture of a company’s valuation and earning potential. It has a more comprehensive approach to valuation.  

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.

The other element of the multiple, EBITDA, gives a clearer picture 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.

Usually, the lower the EV/EBITDA ratio, the more appealing 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.

Another key drawback of P/E is that it can’t be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less amenable to manipulation and be used to value companies that are making loss but are EBITDA-positive.

EV/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/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/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/885080/5-bargain-stocks-boasting-strikingly-low-evebitda-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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AZZ Inc. (AZZ) : Free Stock Analysis Report
 
Hollysys Automation Technologies, Ltd. (HOLI) : Free Stock Analysis Report
 
Global Net Lease, Inc. (GNL) : Free Stock Analysis Report
 
MGM Growth Properties LLC (MGP) : Free Stock Analysis Report
 
Donnelley Financial Solutions Inc. (DFIN) : Free Stock Analysis Report
 
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