An ill-informed investor can lose cash if he wagers on a stock only based on the numbers flashing on a real-time stock screen. A critical analysis of a company’s financial background is a must for a better investment decision, especially at a time when the stock market is juggling myriad issues.
Often, investors evaluate a company’s performance by simply looking at its sales and earnings, which sometimes do not reveal the real picture. To be more precise, they do not tell whether a company’s fundamentals are sound enough to meet its financial obligations. Here, the coverage ratio comes into play — the higher the metric, the more efficient an enterprise will be in meeting its financial obligations.
Sterling Infrastructure, Inc. STRL, Leidos Holdings, Inc. LDOS, Tenet Healthcare Corporation THC and Amazon.com, Inc. AMZN boast an impressive interest coverage ratio.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.
Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, interest coverage ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. 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 with 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 18 stocks that qualified the screening:
Sterling Infrastructure, which is engaged in e-infrastructure, transportation and building solutions, sports a Zacks Rank #1 and has a VGM Score of B. Sterling Infrastructure has a trailing four-quarter earnings surprise of 21.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Sterling Infrastructure’s current financial year sales and EPS suggests growth of 9% and 33.3%, respectively, from a year ago. The stock has surged 185.9% in the past year.
Leidos Holdings, which provides services and solutions in the defense, intelligence, civil and health markets in the United States and internationally, has a VGM Score of A and carries a Zacks Rank #1.
The Zacks Consensus Estimate for Leidos Holdings’ current financial year sales and EPS suggests growth of 6% and 33.6%, respectively, from a year ago. Leidos Holdings has a trailing four-quarter earnings surprise of 29.9%, on average. The stock has risen 91.8% in the past year.
Tenet Healthcare, a diversified healthcare services company in the United States, sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for Tenet Healthcare’s current financial year sales and EPS suggests growth of 1% and 63.2%, respectively, from a year ago. THC has a trailing four-quarter earnings surprise of 59.9%, on average. The stock has skyrocketed 180.9% in the past year.
Amazon, a multinational technology company focusing on e-commerce, cloud computing, online advertising, digital streaming and artificial intelligence, has a Zacks Rank #2 and a VGM Score of B.
The Zacks Consensus Estimate for Amazon’s current financial year sales and EPS suggests growth of 10.8% and 78.3%, respectively, from the year-ago period’s levels. AMZN has a trailing four-quarter earnings surprise of 25.9%, on average. The stock has surged 43.3% in the past year.
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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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Tenet Healthcare Corporation (THC) : Free Stock Analysis Report
Sterling Infrastructure, Inc. (STRL) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
