Zacks.com featured highlights include Oasis Petroleum, ArcBest Corp, United Microelectronics, SpartanNash, and AXIS Capital

Zacks.com featured highlights include Oasis Petroleum, ArcBest Corp, United Microelectronics, SpartanNash, and AXIS Capital

Zacks Equity Research
8 min read
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For Immediate Release

Chicago, IL – May 20, 2022 – Stocks in this week’s article are Oasis Petroleum Inc. OAS, ArcBest Corp. ARCB, United Microelectronics Corp. UMC, SpartanNash Co. SPTN and AXIS Capital Holdings Ltd. AXS.

Tap 5 Bargain Stocks with Amazingly Low EV-to-EBITDA Ratios

Investors generally have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. But even this widely popular valuation metric is not without its pitfalls.

While P/E is hands down the most widely used equity valuation ratio in the market, a relatively less-used metric called EV-to-EBITDA is often viewed as a better option as it offers a clearer picture of a company's valuation and earnings potential. Unlike P/E. which solely considers a company's equity portion, EV-to-EBITDA determines its total value.

Oasis Petroleum Inc., ArcBest Corp., United Microelectronics Corp., SpartanNash Co., and AXIS Capital Holdings Ltd. are some stocks with impressive EV-to-EBITDA ratios.

What Makes EV-to-EBITDA a Better Alternative?

Also referred to as the enterprise multiple, EV-to-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, its debt and preferred stock minus cash and cash equivalents.

EBITDA, the other element, 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 the 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.

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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