The price-to-earnings (P/E) ratio is widely regarded as a yardstick for assessing a stock’s fair value. It is commonly used by investors to identify attractively priced stocks. However, despite its popularity, this valuation metric has notable shortcomings.
While P/E remains the most widely used equity valuation ratio, a more comprehensive metric called EV-to-EBITDA often provides a more accurate assessment of a company’s value. Frequently considered a better alternative to P/E, this ratio delivers a clearer view of a firm’s valuation and earnings-generating potential.
Chatham Lodging Trust CLDT, Par Pacific Holdings, Inc. PARR, Arcos Dorados Holdings Inc. ARCO, Caleres, Inc. CAL and H.B. Fuller Company FUL are some stocks with attractive EV-to-EBITDA ratios.
EV-to-EBITDA Is a Better Approach, Here’s Why
EV-to-EBITDA is essentially 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, gives a better idea of a company’s profitability as it removes the impact of 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-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued. EV-to-EBITDA takes into account the debt on a company’s balance sheet, which the P/E ratio does not. For this reason, EV-to-EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
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. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front. EV-to-EBITDA is also a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It can also be used to compare companies with different levels of debt.
But EV-to-EBITDA has its shortcomings, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa). It is usually not appropriate when comparing stocks in different industries, given their diverse capital requirements.
A strategy solely based on EV-to-EBITDA might not yield the desired results. However, you can club it with the other major ratios in your stock-investing toolbox, such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.
Screening Criteria
Here are the parameters to screen for value stocks:
EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median: The lower the P/S ratio, the more attractive the stock is, as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median.
Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2: It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are our five picks out of the 12 stocks that passed the screen:
Chatham Lodging Trust is a lodging real estate investment trust that invests in premium-branded upscale extended-stay and select-service hotels. This Zacks Rank #1 company has a Value Score of A.
Chatham Lodging Trust has an expected year-over-year earnings growth rate of 26.5% for 2026. The Zacks Consensus Estimate for CLDT’s 2026 earnings has moved up 1.6% over the past 60 days.
Par Pacific Holdings is a growth-oriented energy company supplying conventional and renewable fuels across the western United States. This Zacks Rank #1 company has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Par Pacific Holdings has an expected year-over-year earnings growth rate of 136.1% for 2026. The consensus estimate for PARR’s 2026 earnings has moved up 30.1% over the past 60 days.
Arcos Dorados Holdings operates as a franchisee of McDonald's. It operates the largest quick-service restaurant chain in Latin America and the Caribbean. This Zacks Rank #1 company has a Value Score of A.
Arcos Dorados Holdings has an expected year-over-year earnings growth rate of 180.8% for 2026. The Zacks Consensus Estimate for ARCO’s 2026 earnings has been revised 7.4% upward over the past 60 days.
Caleres designs, develops, sources, manufactures and distributes footwear in the United States, Canada, East Asia and internationally. This Zacks Rank #2 stock has a Value Score of A.
Caleres has an expected year-over-year earnings growth rate of 37% for the current fiscal year. The consensus estimate for CAL’s current fiscal-year earnings has moved up 3.2% over the past 60 days.
H.B. Fuller is a global formulator, manufacturer and marketer of adhesives, sealants, coatings, tapes, encapsulants and related specialty chemical products. This Zacks Rank #2 stock has a Value Score of A.
H.B. Fuller has an expected year-over-year earnings growth rate of 14.9% for the current fiscal year. The Zacks Consensus Estimate for FUL’s current fiscal-year earnings has moved up 2.1% over the past 60 days.
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See Stocks Free >>Chatham Lodging Trust (REIT) (CLDT) : Free Stock Analysis Report
H. B. Fuller Company (FUL) : Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report
Caleres, Inc. (CAL) : Free Stock Analysis Report
Par Pacific Holdings, Inc. (PARR) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
