Zacks.com Featured Highlights Include: Newell Brands, AZZ, Synnex, Vitamin Shoppe And GMS

For Immediate Release

Chicago, IL – October 16, 2019 - Stocks in this week’s article are Newell Brands Inc. (NASDAQ:NWL) , AZZ Inc. (NYSE:AZZ) , Synnex Corp. (NYSE:SNX) , Vitamin Shoppe, Inc. (NYSE:VSI) and GMS Inc. (NYSE:GMS) .

5 Value Stocks with Alluring EV/EBITDA Ratios Own Now

Investors typically have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at attractive prices. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. But even this straightforward, broadly used valuation metric suffers a few downsides.

What Makes EV/EBITDA a Better Substitute?

The popularity of P/E can be attributed to its apparent simplicity. While it is the most commonly used tool for assessing a firm’s value, a more complicated metric called EV/EBITDA does a better job. Also referred to as enterprise multiple, EV/EBITDA offers a clearer picture of a company’s valuation and its earnings potential. While P/E just considers a firm’s equity portion, EV/EBITDA determines its total value.

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 component of the multiple, EBITDA 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.

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.

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 tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, the ratio allows the comparison of companies with different debt levels.

Then again, EV/EBITDA has its shortcomings too. 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, a strategy only based on EV/EBITDA might not fetch the desired results. But you can club it with other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.

For the rest of this Screen of the Week article please visit Zacks.com at:Zacks Investment Research

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Written By: Zacks Investment Research