4 stocks with an impressive interest coverage ratio to invest in – January 20, 2022
We often judge a company based on its sales and profits. These, however, may not be enough. Sometimes a stock gets a boost if those numbers rise year over year or exceed estimates in a particular quarter, providing a great opportunity for an investor with a shorter time horizon to profit. But if you’re looking for long-term returns, investments backed by sales and earnings numbers alone may not yield the desired results.
A critical analysis of a company’s financial situation is a prerequisite for an informed investment decision. Here, the coverage ratios that determine whether a company is strong enough to meet its financial obligations play a crucial role. The higher the ratio, the better. This article focuses on “interest coverage”, which is one such ratio.
Interest coverage ratio = Earnings before interest and tax (EBIT) divided by interest expense.
Why the interest coverage ratio?
The interest coverage ratio is used to determine how efficiently a company can pay interest on its debt.
Debt, which is crucial for most businesses to finance their operations, has a cost called interest. Interest expense has a direct impact on a company’s profitability and its solvency depends on how efficiently it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to consider before making any investment decision.
The interest coverage ratio suggests the number of times interest could be paid out of earnings and assesses the safety margin a company has to pay interest.
An interest coverage ratio below 1.0 implies that the company is unable to meet its interest obligations and may not repay its debt. A business that is able to generate profits far in excess of its interest charges may face financial difficulties. Certainly, one should also track the past performance of the business to determine whether the interest coverage ratio has improved or deteriorated 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 rating and a VGM score an A or B in your search criteria should lead to better results.
Interest coverage ratio above median X-Industry
Price greater than or equal to 5: The stocks must all trade at a minimum of $5 or more.
Historical EPS growth over 5 years (%) above the X-Industry median: Actions that have a strong growth history of the BPA.
Projected EPS growth (%) above median X-Industry: This is the projected EPS growth over the next three to five years. This shows that the stock has potential for near-term earnings growth.
Average volume over 20 days greater than 100,000: 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 regardless of the market environment.
VGM score 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 most upside potential.
Here are four of the 14 actions that qualified the screening:
ArcBest Corporation (ARCB – Free Report), a leader in supply chain logistics, has a Zacks rank of No. 2 and a VGM score of A. The expected three-to-five-year EPS growth rate is 45.3%. You can see the full list of today’s Zacks #1 Rank stocks here.
Zacks’ consensus estimate for ArcBest Corporation’s current-year sales and EPS suggests growth of 32.7% and 139.9%, respectively, over the prior-year period. ARCB has a surprise on earnings for the last four quarters of 27.4% on average.
Advanced Micro Devices, Inc. (AMD – Free Report), which operates as a semiconductor company worldwide, has a Zacks rank of No. 2 and a VGM score of B. The expected three-to-five-year EPS growth rate is 46.2 %.
Zacks consensus estimate for Advanced Micro Devices current-year sales and EPS suggests growth of 65.2% and 105.4%, respectively, over the prior year period . AMD has a four-quarter earnings surprise of 14%, on average.
AGCO Company (AGCO – Free Report), which designs, manufactures and distributes agricultural machinery and precision farming technology, has a Zacks Rank No. 2 and a VGM score of A. The projected EPS growth rate for three to five years is 19.1 %.
Zacks’ consensus estimate for AGCO Corporation’s current year sales and EPS suggests growth of 20.6% and 61%, respectively, over the prior year period. AGCO has a surprise on earnings for the last four quarters of 47.5% on average.
Vertex Pharmaceuticals Incorporated (VRTX – Free Report), engaging in the development and commercialization of therapies to treat cystic fibrosis, has a Zacks Rank of No. 2 and a VGM score of B. The projected EPS growth rate for three-five years is 15 .5%.
The Zacks consensus estimate for Vertex Pharmaceuticals’ current year sales and EPS suggests growth of 20.6% and 25.6%, respectively, over the prior year period. VRTX has a last four quarter earnings surprise of 8% on average.
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Disclosure: The leaders, administrators and / or employees of Zacks Investment Research may own or have sold short and / or short positions on the options mentioned in this document. An affiliate investment consulting firm may detain or sold securities and / or hold long and / or short positions on options mentioned in this document.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.