For Immediate Release
Chicago, IL - October 4, 2018 - Stocks in this week's article include: Altra Industrial Motion Corp. AIMC , Regal Beloit Corp. RBC , Atlas Air Worldwide Holdings, Inc. AAWW , ArcBest Corporation ARCB and Capital One Financial Corp. COF .
Screen of the Week of Zacks Investment Research:
5 Stocks with Amazingly Low EV/EBITDA Ratios to Scoop Up
The price-to-earnings (P/E) ratio is by far the most widely used metric in the value investing world given its apparent simplicity. The idea of hunting stocks with a low P/E is ingrained in the minds of many investors. However, even this ubiquitously used equity valuation multiple has a few pitfalls.
EV/EBITDA is a Better Alternative, But Why?
Although 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 image of a company's valuation and its earnings potential. EV/EBITDA also has a more complete approach to valuation as it determines the total value of a firm as opposed to P/E which considers only its equity portion.
Also referred to as the enterprise multiple, 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, gives a clearer picture of a company's profitability as it eliminates the impact of non-cash expenses like depreciation and amortization that dilute net earnings. It is also often used as a proxy for cash flows.
Typically, the lower the EV/EBITDA ratio, the more enticing it is. A low EV/EBITDA ratio could be a sign that a stock is undervalued.
EV/EBITDA takes into account the debt on a company's balance sheet that P/E ratio does not. Due to 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 downside of P/E is that it can't be used to value a loss-making entity. A company's earnings are also subject to accounting estimates and management manipulation. EV/EBITDA, in contrast, is hard to manipulate and can also be used to value firms 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.
But EV/EBITDA is not without its limitations and it alone can't conclusively determine a stock's inherent potential and future performance. 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 solely banking on EV/EBITDA, you can combine it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen true value stocks.
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/325907/5-stocks-with-amazingly-low-evebitda-ratios-to-scoop-up
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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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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 ArcBest Corporation (ARCB): Free Stock Analysis Report Capital One Financial Corporation (COF): Free Stock Analysis Report Regal Beloit Corporation (RBC): Free Stock Analysis Report Altra Industrial Motion Corp. (AIMC): Free Stock Analysis Report Atlas Air Worldwide Holdings (AAWW): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research