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Buy These 4 Stocks With Attractive Interest Coverage Ratio

The market is trying to cope with headwinds related to inflation, supply chain issues and escalating tensions between Russia and Ukraine. Meanwhile, the Federal Reserve’s aggressive stance to tighten monetary policy to tame inflation has compelled investors to be on their toes. Investors should gauge the changing market dynamics and accordingly chalk out their investment strategy.

We often judge a company on the basis of its sales and earnings. 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, thus offering a great opportunity for an investor with a shorter horizon 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. 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 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.

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 that have 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 12 stocks that qualified the screening:

CBRE Group, Inc. CBRE, the world’s largest commercial real estate services and investment firm, has a Zacks Rank #1 and a VGM Score of A. The expected EPS growth rate for three-five years is 11%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for CBRE Group’s current financial year sales and EPS suggests growth of 14.5% and 4.1%, respectively, from the year-ago period. CBRE has a trailing four-quarter earnings surprise of 34.2%, on average. The stock has jumped 11.8% in the past year.

Dillard's, Inc. DDS, which operates retail department stores, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 14.6%.

The Zacks Consensus Estimate for Dillard's current financial year sales suggests growth of 4.7% from the year-ago period. DDS has a trailing four-quarter earnings surprise of 294.5%, on average. The stock has zoomed 204% in the past year.

Nordson Corporation NDSN, an innovative precision technology company, has a Zacks Rank #2 and a VGM Score of B. The expected EPS growth rate for three-five years is 13%.

The Zacks Consensus Estimate for Nordson Corporation’s current financial year sales and EPS suggests growth of 9% and 16.9%, respectively, from the year-ago period. NDSN has a trailing four-quarter earnings surprise of 9.9%, on average. The stock has appreciated 10.8% in the past year.

Schneider National, Inc. SNDR, a premier multimodal provider of transportation, intermodal and logistics services, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 20.7%.

The Zacks Consensus Estimate for Schneider National’s current financial year sales and EPS suggests growth of 15.2% and 9.2%, respectively, from the year-ago period. SNDR has a trailing four-quarter earnings surprise of 22.1%, on average. The stock has advanced 3.4% in the past year.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.


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Dillard's, Inc. (DDS): Free Stock Analysis Report
 
Nordson Corporation (NDSN): Free Stock Analysis Report
 
Schneider National, Inc. (SNDR): Free Stock Analysis Report
 
CBRE Group, Inc. (CBRE): Free Stock Analysis Report
 
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