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Zacks.com featured highlights include United Natural Foods, PBF Energy, Plains GP Holdings, ArcBest Corporation and SM Energy
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For Immediate Release

Chicago, IL – July 8, 2022 – Stocks in this week’s article are United Natural Foods, Inc. UNFI, PBF Energy Inc. PBF, Plains GP Holdings, L.P. PAGP, ArcBest Corporation ARCB and SM Energy Co. SM.

5 Stocks with Impressive EV-to-EBITDA Ratios to Scoop Up

Price-to-earnings (P/E), given its inherent simplicity, is the most commonly used metric in the value investing world. It is preferred by many investors while handpicking stocks trading at attractive prices. However, even this straightforward, broadly-used valuation metric has a few limitations.

While P/E enjoys great popularity among value investors, a less-used and more-complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA gives the true picture of a company's valuation and earnings potential. It has a more comprehensive approach to valuation.

United Natural Foods, Inc., PBF Energy Inc., Plains GP Holdings, L.P., ArcBest Corporation and SM Energy Co. are some stocks with attractive EV-to-EBITDA ratios.

EV/EBITDA a Better Approach: Here's Why

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, its debt and preferred stock minus cash and cash equivalents.

EBITDA, the other constituent of the ratio, gives a clearer picture of a company's profitability as it removes the impact of non-cash expenses like depreciation and amortization that dampen net earnings. It is also often used as a proxy for cash flows.

Just like P/E, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could be a sign that a stock is potentially undervalued.

EV-to-EBITDA takes into account the debt on a company's balance sheet that the P/E ratio does not. Due to this reason, EV-to-EBITDA is generally used to value the 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 key downside of P/E is that it can't be used to value a loss-making entity. Moreover, 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 companies incurring losses but are EBITDA-positive.

EV-to-EBITDA is also a useful yardstick in evaluating the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.

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