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Zacks.com featured highlights include: US Foods, Pampa Energia, Hertz Global, Lions Gate and GMS

Zacks Equity Research

For Immediate Release

Chicago, IL – October 31, 2019 - Stocks in this week’s article are US Foods Holding Corp. USFD, Pampa Energia S.A. PAM, Hertz Global Holdings, Inc. HTZ, Lions Gate Entertainment Corp. LGF.A and GMS Inc. GMS.

Pick These 5 Bargain Stocks with Impressive EV/EBITDA Ratios

The price-to-earnings (P/E) ratio is broadly considered by investors as a yardstick for assessing the fair market value of a stock. Many prefer to take the P/E route in their quest for stocks that are trading at attractive prices. However, even this widely popular valuation metric is not without its pitfalls.

Is EV/EBITDA a Better Alternative to P/E?

Although P/E is hands down the most widely used equity valuation ratio in the market, a relatively less-used metric called EV/EBITDA is often viewed as a better option as it offers a clearer image of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV/EBITDA determines its total value.

Also dubbed as the enterprise multiple, 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. Essentially, it is the total value of a company.

EBITDA, the other constituent, is a true reflection of a company’s profitability as it strips out 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/EBITDA ratio, the more appealing it is. A low EV/EBITDA ratio could be a sign that a stock is potentially undervalued.

However, unlike P/E ratio, EV/EBITDA takes into account the debt on a company’s balance sheet. For 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.

P/E also 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/EBITDA is difficult to manipulate and can also 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.

However, EV/EBITDA has its limitations too. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.

Thus, 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/592135/Pick-These-5-Bargain-Stocks-With-Impressive-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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Pampa Energia S.A. (PAM) : Free Stock Analysis Report
 
Hertz Global Holdings, Inc (HTZ) : Free Stock Analysis Report
 
GMS Inc. (GMS) : Free Stock Analysis Report
 
US Foods Holding Corp. (USFD) : Free Stock Analysis Report
 
Lions Gate Entertainment Corp. (LGF.A) : Free Stock Analysis Report
 
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