For Immediate Release
Chicago, IL - January 31, 2019 - Stocks in this week's article include City Office REIT, Inc. CIO , Popular, Inc. BPOP , Edison International EIX , Applied Optoelectronics, Inc. AAOI and MDU Resources Group, Inc. MDU . Kevin Matras screens for companies showing their 'first' profit and explains why they are ones to watch. Screen of the Week written by Kevin Matras of Zacks Investment Research:
Tap These 5 Bargain Stocks with Impressive EV/EBITDA Ratios
The price-to-earnings (P/E) ratio is the most commonly used tool for evaluating a firm's value due to its simplicity. A widely favored approach by value investors is to chase for stocks that have a low P/E ratio. However, even this broadly used valuation multiple is not without its shortcomings.
What Makes EV/EBITDA a Better Alternative?
Although P/E is preferred by many investors while uncovering bargain 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 has a more comprehensive approach to valuation as it determines a firm's total value. In contrast, P/E just considers a firm's 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.
EBITDA, the other component of the multiple, is a true reflection of a company's profitability as it removes the impact of non-cash expenses like depreciation and amortization that dilute ne t earnings .
Generally, the lower the EV/EBITDA ratio, the more enticing 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.
Another shortcoming of P/E is that it can't be used to value a loss-making firm. A company's earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less open to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA is also a useful yardstick 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.
Hence, 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 bargain stocks.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/350173/tap-these-5-bargain-stocks-with-impressive-evebitda-ratios
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Edison International (EIX): Free Stock Analysis Report MDU Resources Group, Inc. (MDU): Free Stock Analysis Report Popular, Inc. (BPOP): Free Stock Analysis Report Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report City Office REIT, Inc. (CIO): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research