For Immediate Release
Chicago, IL – July 27, 2020 – Stocks in this week’s article are Plains GP Holdings, L.P. PAGP, Principal Financial Group, Inc. PFG, Laboratory Corporation of America Holdings LH, Korea Electric Power Corp. KEP and Piedmont Office Realty Trust, Inc. PDM.
Tap These 5 Bargain Stocks with Alluring EV/EBITDA 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 a bargain. But even this universally used valuation multiple is not without its limitations.
What Makes EV-to-EBITDA a Better Substitute?
Although 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, 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.
Typically, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could be a sign 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.
P/E also can’t be used to value a loss-making firm. A company’s earnings are subject to accounting estimates and management manipulation as well. 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 tool in assessing the value of companies that are highly leveraged and have a high degree of depreciation. The ratio also allows the comparison of companies with different debt levels.
However, EV-to-EBITDA is not without its shortcomings and alone cannot conclusively determine a stock’s inherent potential and future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
As such, a strategy entirely based on EV-to-EBITDA might not fetch the desired outcome. But you can club it with other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/1015128/tap-these-5-bargain-stocks-with-alluring-evtoebitda-ratios
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Korea Electric Power Corporation (KEP) : Free Stock Analysis Report
Laboratory Corporation of America Holdings (LH) : Free Stock Analysis Report
Principal Financial Group, Inc. (PFG) : Free Stock Analysis Report
Piedmont Office Realty Trust, Inc. (PDM) : Free Stock Analysis Report
Plains Group Holdings, L.P. (PAGP) : Free Stock Analysis Report
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