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Zacks.com featured highlights include: Vista Outdoor, AdvanSix, Schneider National, PetroChina and DXC Tech
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For Immediate Release

Chicago, IL – November 29, 2021 – Stocks in this week’s article are Vista Outdoor Inc. VSTO, AdvanSix Inc. ASIX, Schneider National, Inc. SNDR, PetroChina Company Ltd. PTR and DXC Technology Company DXC.

5 Stocks with Impressive EV-to-EBITDA Ratios to Snap 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 to handpick stocks trading at attractive prices. However, even this straightforward, broadly used valuation metric has a few limitations.

What Makes EV-to-EBITDA a Better Alternative?

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.

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.

The other component of the multiple, EBITDA, 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.

Usually, the lower the EV-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued.

However, unlike P/E ratio, EV-to-EBITDA takes into account the debt on a company’s balance sheet. Given this reason, EV-to-EBITDA is usually used to value the possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.

Moreover, P/E can’t be used to value a loss-making firm. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can also be used to value companies that have negative net earnings but are positive on the EBITDA front.

EV-to-EBITDA is also a useful tool 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.

But EV-to-EBITDA has its limitations too. The ratio varies across industries (a high-growth industry typically has higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries given their diverse capital requirements.

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