These 4 stocks have an impressive interest coverage ratio
An uninformed investor can end up losing money if they bet on a stock purely on the basis of the numbers flashing on a real-time stock market screen. A critical analysis of a company’s financial environment is essential for making sound investment decisions.
Often times, investors assess a company’s performance by simply looking at its sales and profits, which sometimes don’t reveal the real picture. To be more precise, they do not say whether the fundamentals of a company are strong enough to meet its financial obligations. Here, the coverage ratio comes into play: the higher the metric, the more efficient a business will be in meeting its financial obligations.
Why an interest coverage ratio?
The interest coverage rate is used to determine how efficiently a business can pay interest charges on its debt.
Debt, which is crucial in financing the operations of most businesses, has a cost called interest. Interest expense has a direct impact on the profitability of a business. The solvency of the enterprise depends on the efficiency with which it meets its interest obligations. Therefore, the interest coverage rate is one of the important criteria to consider before making any investment decision.
Interest coverage ratio = Earnings before interest and taxes (EBIT) divided by interest expense.
The interest coverage rate suggests how many times interest could be paid out of profits and assesses the margin of safety a business has to pay interest.
An interest coverage ratio of less than one suggests that the business is unable to meet its interest obligations and could default on debt repayments. A business capable of generating profits well in excess of its interest expense can endure financial hardship. You also need to track the past performance of the business to determine whether the interest coverage ratio has improved or worsened over a period of time.
The winning strategy
In addition to having an interest coverage ratio above the industry average, the addition of a favorable Zacks ranking and a VGM score of A or B to your search criteria should lead to better results.
Interest coverage ratio above industry median X
Price greater than or equal to 5: The stocks should all trade at a minimum of $ 5 or more.
Historical 5-year EPS growth (%) above industry X median: Stocks that have a history of strong EPS growth.
Projected EPS growth (%) above industry X median: This is the projected growth in BPA over the next three to five years. This shows that the stock has the potential for short-term earnings growth.
Average volume over 20 days greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Rank of Zacks less than or equal to 2: Zacks Rank # 1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.
VGM score less than or equal to B: Our research shows that stocks with an VGM score of A or B when combined with a rank 1 or 2 of Zacks offer the best upside potential.
Here are four of the 11 actions that qualified the screening:
Dillard’s, Inc. DDS, which operates large retail stores, has a Zacks Rank # 1 and VGM Score of A. The company has an expected EPS growth rate of 14.6% for three to five years. You can see The full list of today’s Zacks # 1 Rank stocks here.
Zacks’ consensus estimate for Dillard’s current year sales suggests growth of 50.8% over the previous year. DDS has a surprise earnings over the last four quarters of 282%, on average.
ArcBest Corporation ARCB, a leader in supply chain logistics, has a Zacks Rank # 1 and VGM Score of A. The expected three to five year EPS growth rate is 45.3%.
Zacks’ consensus estimate for ArcBest Corporation’s current year sales and EPS suggests growth of 32.6% and 139.3%, respectively, from the prior year period. The ARCB has a surprise profit for the last four quarters of 27.4% on average.
CBRE Group, Inc. CBRE, a commercial real estate services and investment company, has a Zacks Rank # 2 and VGM Score of B. The expected three to five year EPS growth rate is 11%.
Zacks’ consensus estimate for CBRE Group’s current year sales and EPS suggests growth of 14.5% and 62.1%, respectively, from the prior year period. CBRE has a profit surprise for the last four quarters of 41%, on average.
Advanced Micro Devices, Inc. AMD, which operates as a worldwide semiconductor company, has a Zacks Rank # 2 and VGM Score of B. The expected three to five year BPA growth rate is 46.2%.
Zacks Consensus Estimate for Current Year Sales and Advanced Micro Devices EPS suggest growth of 65.2% and 105.4%, respectively, from the prior year period . AMD has a surprise profit over the last four quarters of 14%, on average.
Get the rest of the actions on the list and start testing this idea and others. All of this can be done with Research Wizard stock picking and backtesting software.
The Research Assistant is a great place to start. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your research assistant trial today. And the next time you read an economic report, open the research assistant, plug in your findings, and see what gems come out of it.
Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
Disclosure: Information on the performance of Zacks’ portfolios and strategies can be found at: https://www.zacks.com/performance.
Boom in infrastructure stocks will sweep America
A massive push to rebuild crumbling American infrastructure will soon be underway. It is bipartisan, urgent and inevitable. Billions will be spent. Fortunes will be made.
The only question is, “Are you going to jump into good stocks early when they have the greatest potential for growth?” “
Zacks published a special report to help you do just that, and today it’s free. Discover 5 special companies looking to make the most of the construction and repair of roads, bridges and buildings, as well as transporting goods and transforming energy on an almost unimaginable scale.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.