For Immediate Release
Chicago, IL – April 14, 2021 – Stocks in this week’s article are The Mosaic Company MOS, Atlas Corp. ATCO, ACCO Brands Corporation ACCO, AdvanSix Inc. ASIX and Global Net Lease, Inc. GNL.
5 Value Stocks with Impressive EV-to-EBITDA Ratios to Snap Up
Price-to-earnings (P/E), owing 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.
EV-to-EBITDA is a Better Approach, Here's Why
While P/E is hands down the most widely used equity valuation ratio in the market, a relatively less-used metric called EV-to-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-to-EBITDA determines its total value.
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 component, is a true reflection 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.
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. Given this reason, EV-to-EBITDA is generally used to value 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.
Moreover, EV-to-EBITDA is 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.
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/1389069/5-value-stocks-with-impressive-ev-to-ebitda-ratios-to-snap-up
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The Mosaic Company (MOS) : Free Stock Analysis Report
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AdvanSix Inc. (ASIX) : Free Stock Analysis Report
Atlas Corp. (ATCO) : Free Stock Analysis Report
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