LG Display, Haverty Furniture, Tronox Holdings, Graphic Packaging and ASE Tech
For immediate release
Chicago, IL – May 14, 2021 – The stocks in this week’s article are LG Display Co., Ltd.LPL, Haverty Furniture Companies, Inc. HVT, Tronox Holdings plc TROX, Graphic Packaging Holding Co. GPK and ASE Technology Holding Co., Ltd. ASX.
5 value stocks with exciting EV / EBITDA ratios to own now
The price / earnings (P / E) ratio is widely viewed by investors as the yardstick for measuring the fair market value of a stock. It is preferred by many investors to select stocks at attractive prices. But even this universally used valuation multiple is not without its flaws.
Why EV-to-EBITDA is a better alternative?
While P / E enjoys great popularity among value investors, a less used and more complicated metric called EV-EBITDA is sometimes seen as a better alternative. EV-EBITDA gives a true picture of the valuation and profit potential of a company. He has a more holistic approach to evaluation.
EV-EBITDA is 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, debt, and preferred stock less cash and cash equivalents.
EBITDA, the other element of the multiple, gives a clearer picture of a company’s profitability because it removes the impact of non-cash expenses like depreciation and amortization that depress the bottom line. It is also often used as an indicator of cash flow.
Usually, the lower the EV / EBITDA ratio, the more attractive it is. A low EV / EBITDA ratio could indicate that a stock is potentially undervalued.
However, unlike the P / E ratio, EV / EBITDA takes into account a company’s balance sheet debt. For this reason, EV-EBITDA is typically used to assess possible acquisition targets. Stocks with a low EV / EBITDA multiple could be seen as potential candidates for a takeover.
Additionally, the P / E cannot be used to value a loss making business. A company’s profits are also subject to accounting estimates and management manipulation. In contrast, EV-EBITDA is more difficult to manipulate and can also be used to assess companies that have negative net income but are positive on the EBITDA front.
EV-EBITDA is also a useful tool for measuring the value of companies that are heavily indebted and have a high degree of depreciation. Additionally, it can be used to compare companies with different levels of debt.
But EV-to-EBITDA also has its limits. The ratio varies from sector to sector (a high growth sector usually has a higher multiple and vice versa) and is generally not appropriate for comparing stocks of different sectors given the diversity of their needs in capital.
Therefore, instead of relying solely on EV / EBITDA, you can combine it with the other major ratios such as book price (P / B), P / E and sell price (P / S) at achieve the desired results.
For the rest of this article on the screen of the week, please visit Zacks.com at: https://www.zacks.com/stock/news/1545392/5-value-stocks-with-exciting-ev-to-ebitda-ratios-to-own-now
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