You can simply arrive at a decision to Buy or
Sell a particular stock by looking at its sales and earnings
numbers. But such a strategy does not always warrant superior
returns. A critical analysis of the companyâs financial background
is always required for a better investment decision.
A companyâs fundamentals should be sound enough to meet its
financial obligations. This can be judged with coverage ratios â
the higher these are the more efficient an enterprise will be in
meeting its financial obligations. Here we have discussed one such
ratio â the Interest Coverage 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 charged 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 the companyâs
creditworthiness depends on how effectively it meets its 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 also 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 hardship.
Definitely, one should also track the companyâs past performance to
determine whether the interest coverage ratio has improved or
worsened over a period of time.
Whatâs the 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 13 stocks that qualified the screening:
CBRE Group, Inc. CBRE, a commercial real estate
services and investment company, sports a Zacks Rank #1 and VGM
Score of B. The expected EPS growth rate for 3-5 years is 11%. You
can see the complete list of todayâs Zacks #1 Rank stocks
here.
Insperity, Inc. NSP, which provides human
resources and business solutions, has a VGM Score of B. This Zacks
Rank #1 company has an expected EPS growth rate of 18% for 3-5
years.
Euronet Worldwide, Inc. EEFT, which provides
payment and transaction processing and distribution solutions, has
a VGM Score of B. This Zacks Rank #2 company has an expected EPS
growth rate of 13.3% for 3-5 years.
Intuit Inc. INTU, which provides financial
management and compliance products and services, has a VGM Score of
B. This Zacks Rank #2 company has an expected EPS growth rate of
16.2% for 3-5 years.
Get the rest of the stocks on the list and start putting this and
other ideas to the test. It can all be done with the Research
Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use.
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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 Zacksâ portfolios and
strategies are available at:
https://www.zacks.com/performance.
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report
Intuit Inc. (INTU) : Free
Stock Analysis Report
Euronet Worldwide, Inc.
(EEFT) : Free Stock Analysis Report
Insperity, Inc. (NSP) :
Free Stock Analysis Report
CBRE Group, Inc. (CBRE) :
Free Stock Analysis Report
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