Investors generally tend to cling to the price-to-earnings (P/E) metric while looking for bargain stocks. In addition to being a widely used tool for screening stocks, P/E is also a popular metric to work out the fair market value of a company. But even this ubiquitously used valuation multiple has a few downsides.
While P/E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often considered a better alternative to P/E, it gives the true picture of a company’s valuation and earnings potential and has a more complete approach to valuation. While P/E considers a firm’s equity portion, EV-to-EBITDA determines its total value.
OppFi Inc. OPFI, Nu Skin Enterprises, Inc. NUS, BJ's Restaurants, Inc. BJRI, MRC Global Inc. MRC and KT Corporation KT are some stocks with attractive EV-to-EBITDA ratios.
Is EV-to-EBITDA a Better Substitute to P/E?
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, debt and preferred stock minus cash and cash equivalents. EBITDA, the other component, 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.
The lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio indicates 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.
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. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value loss-making but EBITDA-positive companies. EV-to-EBITDA is also a useful yardstick for 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 limitations, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.
A strategy solely based on EV-to-EBITDA might not yield the desired results. 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 22 stocks that passed the screen:
OppFi is a tech-enabled specialty finance platform that powers community banks to help everyday consumers gain access to credit. This Zacks Rank #1 stock has a Value Score of A.
OppFi has an expected year-over-year earnings growth rate of 12.6% for 2025. The Zacks Consensus Estimate for OPFI’s 2025 earnings has been revised 7% upward over the past 60 days.
Nu Skin Enterprises develops and distributes a wide range of premium cosmetics, beauty, personal care and wellness products. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nu Skin Enterprises has an expected year-over-year earnings growth rate of 17.9% for 2025. The consensus estimate for NUS’ 2025 earnings has been revised 13.8% upward over the past 60 days.
BJ's Restaurants owns and operates a chain of high-end casual dining restaurants in the United States. This Zacks Rank #1 stock has a Value Score of B.
BJ's Restaurants has an expected year-over-year earnings growth rate of 17.7% for 2025. The consensus estimate for BJRI’s 2025 earnings has been revised 13.8% upward over the past 60 days.
MRC Global is one of the leading distributors of pipes, valves, fittings and related products and services. This Zacks Rank #2 stock has a Value Score of A.
MRC Global has an expected earnings growth rate of 50% for 2025. The consensus estimate for MRC’s 2025 earnings has been revised 1% higher over the past 60 days.
KT Corporation is the biggest telecommunications operator in the Republic of Korea. This Zacks Rank #2 stock has a Value Score of A.
KT has an expected earnings growth rate of 287.1% for 2025. The Zacks Consensus Estimate for KT's 2025 earnings has been revised 6.7% upward over the past 60 days.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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