Zacks.com Featured Highlights Include: Verso, Dean Foods, Tutor Perini, Hilltop And PennyMac

For Immediate Release

Chicago, IL – January 22, 2018 - Stocks in this week’s article Verso Corporation (NYSE:VRS) , Dean Foods Company (NYSE:DF) , Tutor Perini Corporation (NYSE:TPC) , Hilltop Holdings Inc. (NYSE:HTH) and PennyMac Financial Services, Inc. (NYSE:PFSI) .

Tap 5 Value Stocks with Amazingly Low EV/EBITDA Ratios

Value investors typically tend to get fixated on the price-to-earnings (P/E) strategy while seeking stocks that are trading at a bargain. Undoubtedly, P/E is the most popular multiple used by investors to assess the fair market value of a stock. However, even this widely used valuation metric is not without its pitfalls.

Is EV/EBITDA a Better Alternative to P/E?

While P/E enjoys huge popularity in the value investing world, a more complicated valuation metric called EV/EBITDA works even better. The ratio offers a clearer picture of a firm’s valuation and earnings potential. EV/EBITDA, also referred to as enterprise multiple, determines the total value of a firm while P/E just considers its 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. In essence, it is the full value of a firm.

The other component of the ratio, EBITDA is a true reflection of a company’s profitability as it eliminates the impact of non-cash expenses like depreciation and amortization that dilute net earnings.

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.

EV/EBITDA takes into account the debt on a company’s balance sheet that P/E ratio ignores. Given this reason, EV/EBITDA is typically used to value potential acquisition targets as it shows the amount of debt the acquirer has to bear. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.

Another major limitation of P/E is that it can’t 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 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 evaluating 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 has its downsides too. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.

Thus, instead of just relying 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.

For the rest of this Screen of the Week article please visit Zacks.com at: Original post

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Written By: Zacks Investment Research