For Immediate Release
Chicago, IL – June 24, 2019 - Stocks in this week’s article are Hibbett Sports, Inc. HIBB, Comtech Telecommunications Corp. CMTL, Quanta Services, Inc. PWR, Principal Financial Group, Inc. PFG and Zions Bancorporation ZION.
Tap These 5 Value Stocks with Impressive EV/EBITDA Ratios
The price-to-earnings (P/E) ratio is by far the most widely used metric in value investing given its apparent simplicity. The idea of chasing stocks with a low P/E is ingrained in the minds of many investors. However, even this broadly used valuation multiple is not without its shortcomings.
What Makes EV/EBITDA a Better Choice?
Although P/E is preferred by many investors while uncovering value stocks, another valuation metric called EV/EBITDA does a better job. The ratio is sometimes viewed as a superior substitute as it offers a clearer picture of a firm’s valuation and its earnings potential. EV/EBITDA, also referred to as the enterprise multiple, has a more comprehensive approach to valuation as it determines a firm’s total value. In contrast, P/E just considers the equity portion of a firm.
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.
The other element of the multiple, EBITDA, 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. It is also often used as a proxy for cash flows.
Generally, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
EV/EBITDA takes into account the debt on a company’s balance sheet that P/E ratio does not. Given 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.
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/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 assessing 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.
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.
As such, a strategy entirely based on EV/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 true value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/432661/tap-these-5-value-stocks-with-impressive-evebitda-ratios
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Comtech Telecommunications Corp. (CMTL) : Free Stock Analysis Report
Zions Bancorporation (ZION) : Free Stock Analysis Report
Quanta Services, Inc. (PWR) : Free Stock Analysis Report
Principal Financial Group, Inc. (PFG) : Free Stock Analysis Report
Hibbett Sports, Inc. (HIBB) : Free Stock Analysis Report
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