Zacks.com featured highlights KT, Pampa Energia, Hewlett Packard, Nomad Foods and Hamilton Insurance

Zacks Equity Research
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For Immediate Release

Chicago, IL – October 2, 2024 – Stocks in this week’s article are KT Corp. KT, Pampa Energia S.A. PAM, Hewlett Packard Enterprise Co. HPE, Nomad Foods Ltd. NOMD and Hamilton Insurance Group, Ltd. HG.

5 Value Stocks with Alluring EV-to-EBITDA Ratios to Snap Up

Investors are typically fixated on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straightforward, easy-to-calculate ratio is the most preferred among all the valuation metrics in the investment toolkit for working out the fair market value of a stock. But even this ubiquitously used valuation metric is not without its pitfalls.

While P/E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often considered a better alternative to P/E, it gives the true picture of a company’s valuation and earnings potential and has a more complete approach to valuation. While P/E considers a firm’s equity portion, EV-to-EBITDA determines its total value.

KT Corp., Pampa Energia S.A., Hewlett Packard Enterprise Co., Nomad Foods Ltd. and Hamilton Insurance Group, Ltd. are some stocks with attractive EV-to-EBITDA ratios.

Is EV-to-EBITDA a Better Substitute to P/E?

EV-to-EBITDA is essentially 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 component of the multiple, 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.

Just like P/E, 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. EV-to-EBITDA takes into account the debt on a company’s balance sheet that the P/E ratio does not. Due to this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.

Another shortcoming of P/E is that it can’t be used to value a loss-making firm. 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 loss-making but EBITDA-positive companies. EV-to-EBITDA is also a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It can be used to compare companies with different levels of debt.

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