For Immediate Release
Chicago, IL – July 10, 2020 – Stocks in this week’s article are Oasis Midstream Partners LP OMP, Big Lots, Inc. BIG, Office Depot, Inc. ODP, B&G Foods, Inc. BGS and Mr. Cooper Group Inc. COOP.
5 Value Stocks with Enticing EV-to-EBITDA Ratios to Own Now
Investors generally have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at attractive prices. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. But even this straightforward, broadly used valuation metric suffers a few downsides.
EV-to-EBITDA is a Better Approach, Here’s Why
While P/E enjoys great popularity among value investors, a more-complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA, also referred to as the enterprise multiple, gives the true picture of a company’s valuation and earning potential. Additionally, it has a more comprehensive approach to valuation.
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, its debt and preferred stock minus cash and cash equivalents.
The other component 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-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could be a sign that a stock is potentially undervalued.
EV-to-EBITDA takes into account the debt on a company’s balance sheet that P/E ratio does not. Given 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.
Moreover, P/E can’t be used to value a loss-making firm. A firm’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 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.
Then again, EV-to-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-to-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.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/1000780/5-value-stocks-with-enticing-evtoebitda-ratios-to-own-now
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Big Lots, Inc. (BIG) : Free Stock Analysis Report
Office Depot, Inc. (ODP) : Free Stock Analysis Report
BG Foods, Inc. (BGS) : Free Stock Analysis Report
Oasis Midstream Partners LP (OMP) : Free Stock Analysis Report
MR. COOPER GROUP INC (COOP) : Free Stock Analysis Report
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