Relying solely on stock price movements without understanding the company’s fundamentals can cause investors to lose money. Investors must carefully review a company's financial health to make informed decisions, especially in today’s unpredictable market.
While sales and earnings are often the go-to metrics, they can sometimes be misleading and may not show whether a company has the financial strength to cover its obligations. This is where the coverage ratio holds the key — a higher ratio signals that a company is more capable of meeting its financial commitments.
BioMarin Pharmaceutical Inc. BMRN, Amazon.com, Inc. AMZN, Leidos Holdings, Inc. LDOS and The Ensign Group, Inc. ENSG 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, the 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.
The 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 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 15 stocks that qualified the screening:
BioMarin Pharmaceutical, a global biotechnology company, sports a Zacks Rank #1 and a VGM Score of A. BMRN has a trailing four-quarter earnings surprise of 28.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BioMarin’s current financial year sales and EPS suggests growth of 16.5% and 58.2%, respectively, from the year-ago period’s levels. The stock has fallen 32.8% in the past year.
Amazon, a multinational technology company focused on e-commerce, cloud computing, online advertising, digital streaming and artificial intelligence, has a Zacks Rank #2 and a VGM Score of A.
The Zacks Consensus Estimate for Amazon’s current financial year sales and EPS calls for growth of 10.9% and 82.4%, 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 47.8% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
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 #2.
The Zacks Consensus Estimate for Leidos Holdings’ current financial year sales and EPS suggests growth of 6.4% and 37.4%, respectively, from a year ago. Leidos Holdings has a trailing four-quarter earnings surprise of 29.9%, on average. The stock has risen 45.2% in the past year.
Ensign Group, a healthcare company that provides nursing, assisted living and other rehabilitation services, carries a Zacks Rank #2 and has a VGM Score of B. ENSG has a trailing four-quarter earnings surprise of 1.3%, on average.
The Zacks Consensus Estimate for Ensign Group’s current financial year sales and EPS implies growth of 14% and 15.1%, respectively, from the year-ago period. The stock has rallied 19% 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 back test 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.
Click here to sign up for a free trial to the Research Wizard today.
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 is available at: https://www.zacks.com/performance.
Zacks' Research Chief Names "Stock Most Likely to Double"
Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.
This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpAmazon.com, Inc. (AMZN) : Free Stock Analysis Report
BioMarin Pharmaceutical Inc. (BMRN) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
The Ensign Group, Inc. (ENSG) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
