For Immediate Release
Chicago, IL – Dec 4, 2017 - Stocks in this week’s article include: SORL Auto Parts, Inc. SORL, Cosan Limited CZZ, American Equity Investment Life Holding Company AEL, Prudential Financial, Inc. PRU and Fiat Chrysler Automobiles N.V. FCAU.
Screen of the Week of Zacks Investment Research:
5 Value Picks with Amazingly Low EV/EBITDA Ratios
The price-to-earnings (P/E) ratio is by far the most widely used metric in the value investing world due to its simplicity. Many prefer to take the P/E route in their quest for stocks that are trading at attractive prices. But even this ubiquitously used equity valuation multiple is not devoid of limitations.
Is EV/EBITDA a Better Substitute to P/E?
While P/E is the most commonly used tool for evaluating a firm’s value, another valuation metric called EV/EBITDA works even better. The ratio is often viewed as a better alternative to P/E as it offers a clearer picture of a company’s valuation and earnings potential. EV/EBITDA determines the total value of a company while P/E solely considers its equity portion.
EV/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. Simply put, it is the total value of a firm.
The other component of the ratio, EBITDA 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 better 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.
Another limitation 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. On the other hand, EV/EBITDA is difficult to manipulate and also can be used to value entities that have negative net earnings but are positive on the EBITDA front.
EV/EBITDA is also a useful yardstick in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It also can be used to compare companies with different levels of debt.
Then again, EV/EBITDA has its flaws too. 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.
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.
And that's what we're screening for today…
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/284719/5-value-picks-with-amazingly-low-evebitda-ratios
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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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Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
SORL Auto Parts, Inc. (SORL) : Free Stock Analysis Report
American Equity Investment Life Holding Company (AEL) : Free Stock Analysis Report
Prudential Financial, Inc. (PRU) : Free Stock Analysis Report
Cosan Limited (CZZ) : Free Stock Analysis Report
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