Given the current scenario, investors should gauge the changing market dynamics and accordingly chalk out a sturdy investment strategy. You can simply arrive at a decision to buy or sell a particular stock by looking at its sales and earnings numbers. But such a strategy does not always warrant superior returns when the market is facing myriad issues. A critical analysis of the company’s financial background is always required for a better investment decision.
Well, a company should be sound enough to meet its financial obligations. This can be judged with coverage ratios — the higher these are the more efficient an enterprise will be in meeting its financial obligations. Here we have discussed one such ratio called the interest coverage ratio.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Cambium Networks Corporation CMBM, ExlService Holdings, Inc. EXLS, ServiceNow, Inc. NOW and Keysight Technologies, Inc. KEYS are four stocks with an impressive interest coverage ratio.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.
Debt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profits of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
The interest coverage ratio suggests the number of times interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.
An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardship. Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.
What’s the Strategy?
Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.
Interest coverage ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks that have a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are the four picks out of the nine stocks that qualified the screening:
Cambium Networks Corporation, a leading provider of wireless networking infrastructure solutions, carries a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 16%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Cambium Networks’ current financial year sales and EPS suggests growth of 13.6% and 27.7%, respectively, from the year-ago period. CMBM delivered an earnings surprise of 118.6% in the last reported quarter. The stock has declined 7.1% in the past year.
ExlService Holdings, a leading data analytics and digital operations and solutions company, carries a Zacks Rank #2 and has a VGM Score of B. The expected EPS growth rate for three-five years is 14.5%.
The Zacks Consensus Estimate for both ExlService Holdings’ current financial year sales and EPS suggests growth of 12.5% from the year-ago period. EXLS delivered an earnings surprise of 9.3% in the last reported quarter. The stock has rallied 18.7% in the past year.
ServiceNow, which provides enterprise cloud computing solutions, carries a Zacks Rank #2 and has a VGM Score of B. The expected EPS growth rate for three-five years is 28.3%.
The Zacks Consensus Estimate for ServiceNow’s current financial year sales and EPS suggests growth of 22.2% and 21.2%, respectively, from the year-ago period. ServiceNow has a trailing four-quarter earnings surprise of 6.9%, on average. The stock has risen 3.7% in the past year.
Keysight Technologies, which provides electronic design and test solutions to commercial communications, networking, aerospace, defense, automotive, energy, semiconductor, electronic, and education industries, carries a Zacks Rank #2 and a VGM Score of B. The expected EPS growth rate for three-five years is 8.2%.
The Zacks Consensus Estimate for Keysight Technologies’ current financial year sales and EPS suggests growth of 2.8% and 5%, respectively, from the year-ago period. Keysight Technologies has a trailing four-quarter earnings surprise of 9.7%, on average. The stock has advanced 3.8% in the past year.
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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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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