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Zacks.com featured highlights include: Mr. Cooper, Green Brick Partners, Verso, Foundation Building Materials and Vistra Energy

For Immediate Release

Chicago, IL – April 8, 2020 – Stocks in this week’s article are Mr. Cooper Group Inc. COOP, Green Brick Partners, Inc. GRBK, Verso Corporation VRS, Foundation Building Materials, Inc. FBM and Vistra Energy Corp. VST.

5 Stocks with Amazingly Low EV/EBITDA Ratios to Own Now

Price-to-earnings (P/E), given its apparent simplicity, is the most commonly used metric in the value investing world. The ratio enjoys great popularity among valuation metrics in the investment toolkit and is preferred while picking stocks trading at attractive prices. However, even this straightforward, broadly-used valuation metric has a few downsides.

What Makes EV/EBITDA a Better Choice?

While P/E is by far the most-popular valuation metric, a more-complicated metric called EV/EBITDA does a better job in working out the fair market value of a firm. Often viewed as a better substitute to P/E, this ratio offers a clearer picture of a company’s valuation and its earnings potential.

Also dubbed as the enterprise multiple, EV/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. Essentially, it is the total value of a company.

EBITDA, the other component of the ratio, gives the true picture of a company’s profitability as it eliminates the impact of non-cash expenses like depreciation and amortization that depress net earnings. It is also often used as a proxy for cash flows.

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

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

P/E also can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less amenable to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.

EV/EBITDA is also a useful yardstick in measuring 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.

However, EV/EBITDA has its limitations too. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.

Thus, a strategy entirely based on EV/EBITDA might not fetch the desired outcome. But you can club it with other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.

For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/858538/5-stocks-with-amazingly-low-evebitda-ratios-to-own-now

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.

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Verso Corporation (VRS): Free Stock Analysis Report
 
Green Brick Partners, Inc. (GRBK): Free Stock Analysis Report
 
Vistra Energy Corp. (VST): Free Stock Analysis Report
 
Foundation Building Materials, Inc. (FBM): Free Stock Analysis Report
 
MR. COOPER GROUP INC (COOP): Free Stock Analysis Report
 
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