Collect these 4 promising stocks with an interest coverage ratio – March 25, 2022
You can simply make the decision to buy or sell a particular stock by looking at its sales and profit numbers. But such a strategy doesn’t always guarantee superior returns when the market faces conflicting headlines about inflation, supply chain issues and tensions between Russia and Ukraine. Meanwhile, the Federal Reserve raised the benchmark interest rate by 25 basis points to rein in soaring commodity prices. In today’s environment, investors need to assess changing market dynamics and set their investment strategy accordingly. A critical analysis of the financial context of the company is always necessary for a better investment decision.
A company’s fundamentals must be strong enough to meet its financial obligations. This can be judged using coverage ratios – the higher these are, the more efficient a company will be in meeting its financial obligations. Here we have discussed such a ratio called the interest coverage 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 the imputed 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 profits. The company’s 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 also assesses the headroom 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 well in excess of its interest charges can withstand 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.
CBRE Group, Inc. (CBRE – free report), Tecnoglass Inc. (TGLS – free report), Dillard’s, Inc. (DDS – free report) and Boyd Gaming Corporation (BYD – Free Report) are four stocks with an impressive interest coverage ratio.
What is the 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: Stocks that have a track record of solid EPS growth.
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 our four picks from the 11 stocks that qualified for the selection:
CBRE Group, a commercial real estate and investment services company, sports a Zacks No. 1 ranking and a VGM score of A. The expected three- to five-year EPS growth rate is 11%. You can see the full list of today’s Zacks #1 Rank stocks here.
Zacks’ consensus estimate for CBRE Group’s current-year sales and EPS suggests growth of 22.3% and 6%, respectively, over the prior-year period. CBRE has a four-quarter earnings surprise of 34.2% on average. The stock has jumped 13.9% over the past year.
Tecnoglassa leading manufacturer of architectural glass, windows and related aluminum products serving the global residential and commercial end markets, sports a Zacks #1 ranking and has a VGM score of B. EPS growth rate forecast for three to five years is 20%.
Zacks’ consensus estimate for Tecnoglass’ current year sales and EPS suggests growth of 18.9% and 21.8%, respectively, over the prior year period. TGLS has a last four quarter earnings surprise of 39.9% on average. The stock has climbed 140.5% over the past year.
Dillard’swhich operates large retail stores, carries a Zacks rank of No. 2 and has a VGM score of A. The expected three to five year EPS growth rate is 14.6%.
Zacks’ consensus estimate for Dillard’s current year sales suggests growth of 4.7% over the prior year period. DDS has a four-quarter earnings surprise of 294.5%, on average. The stock has climbed 193% over the past year.
Boyd Gamingwhich operates as a multi-jurisdictional gaming company, carries a Zacks rank of No. 2, and has a VGM score of A. The projected EPS growth rate for three to five years is 48%.
Zacks’ consensus estimate for Boyd Gaming’s current-year sales and EPS suggests growth of 2.3% and 2.9%, respectively, over the prior year period. BYD has a four-quarter earnings surprise of 48.8% on average. The stock has appreciated 15.1% over the past year.
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Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.