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Relying solely on stock price movements without understanding the company’s fundamentals can cause investors to lose money. Investors must carefully review a company's financial health to make informed decisions, especially in today’s unpredictable market.
While sales and earnings are often the go-to metrics, they can sometimes be misleading and may not show whether a company has the financial strength to cover its obligations. This is where the coverage ratio holds the key — a higher ratio signals that a company is more capable of meeting its financial commitments.
Boot Barn Holdings, Inc. BOOT, Sterling Infrastructure, Inc. STRL, Deckers Outdoor Corporation DECK and BioMarin Pharmaceutical Inc. BMRN have impressive interest coverage ratios.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.
Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
The interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over time.
The Winning Strategy
Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.
Interest coverage ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks with a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the 20 stocks that qualified the screening:
Boot Barn Holdings, a leading lifestyle retailer of western and work-related footwear, apparel and accessories, sports a Zacks Rank #1 and has a VGM Score of B. BOOT has a trailing four-quarter earnings surprise of 7.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Boot Barn Holdings’ current financial year sales and earnings per share (EPS) indicates growth of 14.9% and 21.4%, respectively, from the year-ago period. BOOT has jumped 26.1% in the past year.
Sterling Infrastructure, which is engaged in e-infrastructure, transportation and building solutions, sports a Zacks Rank #1 and has a VGM Score of A. Sterling Infrastructure delivered a trailing four-quarter earnings surprise of 16.2%, on average.
The Zacks Consensus Estimate for Sterling Infrastructure’s current financial year EPS suggests growth of 20.5% from a year ago. The stock has surged 17.3% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
Deckers, a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, currently carries a Zacks Rank #2 and has a VGM Score of B.