These 4 Stocks Sport Impressive Interest Coverage Ratio

Addressing shooting commodity prices is of top priority for the Federal Reserve and policymakers have hinted at tightening the monetary policy methodically. The Federal Reserve has signaled a steady increase in the benchmark interest rate and shrinking its $9-trillion balance sheet. We note that the consumer price index rose 1.2% month on month in March, following an increase of 0.8% in February. On a year-over-year basis, the metric rose 8.5%, the fastest pace since December 1981.

At present, investors should gauge the changing market dynamics and accordingly chalk out a sturdy investment strategy. We often judge a company on the basis of its sales and earnings. These, however, may not be enough. Sometimes, a stock gets a boost if these numbers climb year over year or surpass estimates in a particular quarter, thus offering a great opportunity for an investor with a shorter horizon to cash in on. But if you seek long-term returns, investments backed only by sales and earnings numbers may not yield the desired results.

A critical analysis of a company’s financial background is a prerequisite for an informed investment decision. Here, coverage ratios that determine whether a company is sound enough to meet its financial obligations play a crucial role. The higher the ratio, the better. The focus of this article is on “Interest Coverage,” which is one such ratio.

Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.

Why Interest Coverage Ratio?

Interest Coverage Ratio is used to determine how effectively a company can pay the interest charges on its debt.

Debt, which is crucial for most of the companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company and its creditworthiness depends on how effectively it meets interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.

Interest coverage ratio suggests the number of times the interest could be paid from earnings and gauges the margin of safety a firm carries for paying interest.

An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardships. Definitely, 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 that have 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 eight stocks that qualified the screening:

AutoNation, Inc. AN, which operates as an automotive retailer, has a Zacks Rank #1 and a VGM Score of A. The expected EPS growth rate for three-five years is 23.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for AutoNation's current financial year sales and EPS suggests growth of 6.1% and 19%, respectively, from the year-ago period. AN has a trailing four-quarter earnings surprise of 27.4%, on average. The stock has risen 13.9% in the past year.

CBRE Group, Inc. CBRE, the world’s largest commercial real estate services and investment firm, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 11%.

The Zacks Consensus Estimate for CBRE Group’s current financial year sales and EPS suggests growth of 22.3% and 6%, respectively, from the year-ago period. CBRE has a trailing four-quarter earnings surprise of 34.2%, on average. The stock has jumped 1.4% in the past year.

EOG Resources, Inc. EOG, one of the largest crude oil and natural gas exploration and production companies in the United States, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 30.4%.

The Zacks Consensus Estimate for EOG Resources’ current financial year sales and EPS suggests growth of 37.7% and 85.1%, respectively, from the year-ago period. EOG has a trailing four-quarter earnings surprise of 7.1%, on average. The stock has appreciated 55.9% in the past year.

Chevron Corporation CVX, one of the world’s leading integrated energy companies, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 11.6%.

The Zacks Consensus Estimate for Chevron Corporation’s current financial year sales and EPS suggests growth of 22.4% and 107%, respectively, from the year-ago period. CVX has a trailing four-quarter earnings surprise of 6.3%, on average. The stock has advanced 53.3% 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.