For Immediate Release
Chicago, IL – June 10, 2020 – Stocks in this week’s article are Big Lots, Inc. BIG, B&G Foods, Inc. BGS, Oasis Midstream Partners LP OMP, Amkor Technology, Inc. AMKR and Vistra Energy Corp. VST.
5 Value Stocks with Impressive EV/EBITDA Ratios to Scoop Up
Price-to-earnings (P/E) is hands down the most commonly used metric in the value investing world. The ratio enjoys greater popularity among valuation metrics in the investment toolkit and is preferred while uncovering stocks trading at attractive prices. A widely favored approach by value investors is to chase stocks with a low P/E ratio. But even this equity valuation multiple is not devoid of shortcomings.
Why EV/EBITDA is a Better Alternative?
While P/E is by far the most-popular valuation metric, a more-complicated metric called EV/EBITDA does a better job in working out the fair market value of a firm. Often viewed as a better substitute to P/E, this ratio offers a clearer picture of a company’s valuation and its earnings potential.
Also dubbed 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.
The other element of the ratio, EBITDA gives a clearer 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.
Just like P/E, the lower the EV/EBITDA ratio, the more appealing it is. A low EV/EBITDA ratio could be a sign that a stock is potentially undervalued.
However, unlike P/E ratio, EV/EBITDA takes into account the debt on a company’s balance sheet. For 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 key drawback of P/E is that it cannot be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is harder to manipulate and can also be used to value companies 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. Moreover, it can be used to compare companies with different levels of debt.
However, EV/EBITDA is also not without shortcomings and it alone can’t conclusively determine a stock’s inherent potential and its future performance. The multiple varies across industries and is generally not appropriate for comparing stocks in different industries due to their diverse capital requirements.
Thus, instead of solely banking on EV/EBITDA, you can club it with other key ratios in your stock investment toolkit such as price-to-book (P/B), P/E and price-to-sales (P/S) to uncover value stocks.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/973245/5-value-stocks-with-impressive-evebitda-ratios-to-scoop-up
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Big Lots, Inc. (BIG) : Free Stock Analysis Report
Amkor Technology, Inc. (AMKR) : Free Stock Analysis Report
BG Foods, Inc. (BGS) : Free Stock Analysis Report
Vistra Energy Corp. (VST) : Free Stock Analysis Report
Oasis Midstream Partners LP (OMP) : Free Stock Analysis Report
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