Zacks

Zacks.com featured highlights: KB Home, Southwest Airlines, Huntington Ingalls Industries, Time Warner and Carnival

Zacks Equity Research
Updated

For Immediate Release

Chicago, IL – July 18, 2017 - Stocks in this week’s article include KB Home (NYSE: KBH – Free Report ), Southwest Airlines Co. (NYSE: LUV – Free Report ), Huntington Ingalls Industries, Inc. (NYSE: HII – Free Report ), Time Warner Inc. (NYSE: TWX – Free Report ) and Carnival Corporation (NYSE: CCL – Free Report ).

Screen of the Week of Zacks Investment Research:

Buy 5 Stocks with Impressive Interest Coverage Ratio

We often judge a company on the basis of its sales and earnings numbers. These, however, may not be enough. Sometimes, a stock gets a boost if these numbers climb year over year or surpass estimates in a particular quarter. This will definitely be a great opportunity for a short horizon investor to cash in on. But if you seek long-term returns, investments backed only by sales and earnings numbers may not yield the desired results.

A critical analysis of a company’s financial background is a prerequisite for an informed investment decision. Here, coverage ratios that determine whether a company is sound enough to meet its financial obligations play a crucial role. The higher the ratio, the better it is. The focus of this article is on “Interest Coverage”, which is one such ratio.

Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense .

Why Interest Coverage Ratio?

Interest Coverage Ratio is used to determine how effectively a company can pay the interest charges on its debt.

Debt, which is crucial for most of the companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company and its creditworthiness depends on how effectively it meets interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.

Interest Coverage Ratio suggests the number of times the interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.

An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardships. Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of 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.

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